Credit Markets Get Weird in Ghana Zero-Coupon Bond Plan

Africa’s first zero-coupon dollar bond is getting closer to reality, testing the appetite of credit investors to forgo income for a new kind of emerging-market risk.

Ghana is selling the four-year debt to international investors as part of a $3.025 billion Eurobond deal that also includes 20-year, 12-year and seven-year securities. Zero-coupon notes, which are usually sold at a deep discount to face value, are more volatile than bonds that pay regular interest.

It’s another example of the rush into ever-riskier kinds of debt as investors scour the globe for yield, and show how credit markets have opened up to borrowers that would have historically not been allowed to forgo coupons. Ghana’s debt-service costs devour more than 50% of government revenue, compared with the median of 11% for similar-rated sovereigns, Fitch Ratings said this month.

“Whether the zero is a good deal for Ghana will depend on the yield implied in the discount,” said Stephen Bailey-Smith, a Kolding, Denmark-based investment strategist at Global Evolution. “What it does is free up government cash flow in the short-term, but it makes the amortization lumpy.

“The zero-coupon bond is both novel and ambitious,” Mohammed Elmi, a portfolio manager at Federated Hermes Inc., said in an email. “It allows the sovereign to free up resources to spend on development expenditure, health care and education.”


Adopted from Bloomberg