Ghanaian banks’ capital will still weaken significantly as a result of Ghana’s sovereign domestic debt restructuring, despite the improved terms for creditors after several delays and modifications, Fitch Ratings says.


Under the final terms of the domestic debt exchange programme, banks exchanging existing local-currency (LC) government bonds for new bonds with lower coupons and longer tenors will suffer only modestly lower net present value (NPV) losses than under the original terms. The Ministry of Finance (MoF) announced on 14 February that the programme had closed, with creditors representing about 85% of eligible bonds taking part.


Fitch views this as a distressed debt exchange and downgraded Ghana’s Long-Term LC Issuer Default Rating (IDR) to Restricted Default from ‘C’. Ghana’s Long-Term Foreign Currency (FC) IDR remains at ‘C’ given the government’s suspension of payments on selected external debt pending a restructuring of such obligations.

On 30 December, the MoF announced an initial modification to the original terms of the LC sovereign debt exchange proposed on 5 December, in response to local opposition. This increased the number of new bonds to be given in exchange for each old bond to 12 from four, slightly amended the coupon schedules and distinguished eligible bonds maturing in 2023 from those with longer tenors.


The MoF announced final modifications on 3 February, including the payment of a 5% cash coupon and a smaller payment-in-kind coupon in the first two years. The latter increases the principal amount of the new bonds. Retail bondholders were offered more favourable terms. Treasury bills (15% of the banking system’s securities at end-10M22) remained excluded from the exchange.


Although the exchange was formally voluntary, banks were highly incentivised to participate as the risk-weighting of the old bonds will be increased to 100% from 0% and non-participating banks are not eligible for liquidity support from the newly created Ghana Financial Stability Fund.


Banks holding eligible bonds maturing in 2023 will receive seven new bonds with near-equal weights, with one maturing each year from 2027 to 2033. Banks holding eligible bonds maturing after 2023 will receive 12 new bonds with near-equal weights, with one maturing each year from 2027 to 2038. The MoF will pay accrued interest on old bonds in the form of capitalised interest added to the principal of the new bonds.


Fitch previously estimated that the original terms would inflict an NPV loss on creditors of about 50% (see Ghanaian Banks’ Capital to Weaken on Sovereign Debt Restructure). The final terms provide only a small reduction in this and the LC debt exchange will still significantly weaken banking system capitalisation, leading to material capital shortfalls at some banks.


Regulators are in discussions with external auditors and will provide guidance to the financial sector to ensure a standardised accounting approach for the LC debt exchange. Banks are likely to apply flexible accounting to reduce reported losses, where possible, and Fitch expects the Bank of Ghana to ease regulatory requirements to enable banks to remain compliant with minimum capital ratios.


Fitch rates two Nigerian-owned banks in Ghana: Guaranty Trust Bank (Ghana) Limited and United Bank for Africa (Ghana) Limited. Given the banks’ sovereign debt portfolio compositions, sizeable capital buffers and headroom on other rating factors, their Viability Ratings of ’ccc’ should be able to withstand the LC debt restructure and the forthcoming FC debt restructure, as well as the likely asset quality deterioration due to the effects of severe currency depreciation, extremely high inflation and large interest rate rises. The banks’ Long-Term IDRs of ’B-’/Stable continue to be driven by the likelihood of parental support, if needed.


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