Ghana Amalgamated Trust (GAT) has opted to issue bonds, after the private pensions fund managers refused to provide funds for the special purpose vehicle established by the Ministry of Finance to raise equity capital for the recapitalization of five indigenously owned banks.
GAT’s Managing Director, Eric Otoo has disclosed that, the first tranche of the bonds, worth GHC780 million, will be issued before the end of this month and the proceeds will be used to recapitalize four of the five banks.
The first tranche to be raised will be allocated in the following proportion to the five banks: Agricultural Development Bank will get GHc127 million, Prudential Bank GHc251 million, the merged Omni Bank and BSIC (Sahel Sahara Bank) w GHc130 million; and Universal Merchant Bank GHc247 million.
The second tranche of the bonds, worth GHc1.14 billion will be issued shortly after the first tranche. The second tranche aims to recapitalize National Investment Bank – which currently has a capital deficit of over GHC700million – to the new GHC400 million minimum capital requirements.
The GAT aims to issue bonds to the tune of GHC1.92 billion to private investors over the next few weeks, the proceeds of which the Trust will use for the recapitalization. GAT first came to light when the Bank of Ghana (BoG) Governor, Dr. Ernest Addison, announced the status of the banks capitalization at the beginning of the year and hinted of the possibility of the use of private pension funds to shore up some 5 banks that were termed ‘well-run and solvent’.
The bonds will be open to all types of investor, foreign and local, institutional and individual, although the structure of the bonds will appeal primarily to major institutional investors, particularly pension funds and life insurance firms who typically invest in long term.
GAT is expected to pay debt investors a once-off annualized rate of 21 percent when the bonds mature after five years which matches the offered rate on government’s most recent six year treasury bond issue done a few weeks ago and this makes the GAT bonds competitive with regards to pricing. However they have been designed as zero coupon bonds which means all interest will be accumulated and paid as a lump sum along with the principal at the end of the bonds tenor.
The Trust will then seek to exit the holdings through buy-outs or listings on the local bourse.
This makes investment risk considerable; with all interest accruing being piled up to maturity, this means that investors are being asked to bet that GAT can effectively pay double the face value of the bonds five years from now, by selling the shares it will acquire in the banks to interested parties.
“This is why the government guarantees will be crucial in providing comfort to investors in the impending bonds, since they mean that investors in the first tranche are assured of 70 percent of their investment no matter how well the four beneficiary banks do over the next five years; and investors in the second tranche – the relatively high risk NIB – will be assured of their entire investments
Mr Eric Otoo admits that the trust is operating on a tight schedule imposed on it by the Bank of Ghana which insists that all five banks must have been recapitalized by the end of March, which means both issuances must have been successfully completed by that time if the beneficiary banks are not to lose their operating licenses.
The Trust is currently in the process of securing a government guarantee of 70 percent of the value of bonds to be issued as the first tranche; but it is seeking to secure a 100 percent government guarantee for the second tranche. This is due to the fact that, investment into NIB is clearly much riskier, both in the volume of the investment and the financial circumstances of the bank, as compared with the other four beneficiary banks.
Albert Essien, GAT’s Chairman assures that, the guarantees will be provided by government once the requisite approval processes are completed.
GAT has planned to contract banking and finance experts to improve the quality of the beneficiary banks operations over the five year tenor of the bonds in an effort to ensure that they deliver the requisite financial performance to make their respective market values high enough to attract purchase prices that will pay off the GAT bond without recourse to government’s guarantees.