Editorial
Developing a corporate bond market
Last week Access Bank Ghana organized a seminar that brought together a large gathering of financial industry chieftains to deliberate on one of the most important aspects of Ghana’s capital market but one which is sadly underdeveloped – the bond market. For this Access Bank deserves to be unreservedly commended for its selflessness; even though a developed bond market would reduce the demand for direct lending which provide Access Bank and all its counterparts with inordinately wide interest margins, which indeed are the highest contributors to their profits, Access Bank nevertheless is seeking to promote the development of Ghana’s bond market, because it is crucial to the long term financing of both the public and the private sectors.
This is not a brand new theme-a committee with representation from the Bank of Ghana, the Ghana Stock Exchange, the Ministry of Finance and Economic Planning and private capital market firms has been in place since 2002. However progress has been slow, partly because there is very limited knowledge of the usefulness of a bond market and how it works. In raising awareness among all potential stakeholders Access Bank’s seminar has done a world of good towards speeding up the process of developing a proper bond market in Ghana.
So far, the little progress achieved has been with regards to government treasury bonds. Over the past seven years, government has introduced bonds of two, three and five year tenors, and most of them are listed on the Ghana Stock Exchange. Indeed, most of the emphasis at last week’s seminar was again on government bonds.
To be sure, the development of a market for government bonds has been achieved. All of the medium bonds issued, since their introduction over the past few years have been oversubscribed, with foreign and domestic investors alike buying into them enthusiastically. All that is really remaining is for government bonds with long tenors, of up to 10 years and even more to be introduced, like in neighboring Nigeria whose federal government now issues 20 year bonds. This is a matter of ensuring correct pricing of the bonds and ensuring that there is a liquid secondary market so that investors can confidently buy such long term bonds because they will not lose out when short term interest rates rise, and they can amortize their investments whenever they need cash for other purposes.
Which is why this newspaper holds the view that a lot more emphasis should be placed on developing the market for corporate bonds. So far only three companies have issued and listed corporate bonds on the GSE and between them they account for barely two percent of the total bond listings, which altogether account for less than US$1.5 billion. Compare this with the American bond market which is worth over US$31 trillion of which corporate bonds account for some US$20 trillion.
To be sure corporate bonds are direly needed in Ghana. This is because Ghanaian shareholders, individual and institutional alike are loathe to dilute their equity stakes, to secure much needed long term financing for capital expenditure and expansion and so the companies they own prefer bank loan financing. The snag however is that the banks do not have the long term deposits needed to finance long term loans and so those borrowing companies tend to borrow short to finance long term needs and have to keep seeking refinancing of their debts regularly, sometimes, unsuccessfully.
However, if they could issue bonds they would get the long term financing they so direly need,
But, to successfully issue such medium and long term bonds, which would attract subscription by the investing public, corporations need to engender their confidence. This requires efficiently management of their resources, a proper accounting culture, transparency in their operations, and adherence to debt servicing schedules and repayment periods. But even more importantly, bond issuing companies would be required to use all these attributes to procure good credit ratings. Government’s bond issues are successful because the investment risks are low; corporate bonds carry much higher investment risk and thus investors would require a very good credit rating before having the confidence to take that risk.
These requirements are certainly not insurmountable. All the corporate bonds issued on the GSE so far have been fully subscribed, but that is because they have been issued by blue chip financial institutions such as Standard Chartered Bank and HFC Bank. Non-financial institutions with lesser reputations would find the going much harder. Unless a reputable independent credit rating finds reason to recommend them through favourable credit ratings.
Companies seeking long term financing without diluting the equity stakes of their current shareholders therefore need to seek such credit ratings, which they can only get by good corporate governance, operational efficiency, transparent accounting and a good credit history. But considering that the rewards for this would be longer term financing than what the banks can provide thorough direct lending, and at cheaper cost too, surely, it a well worth the effort.
Developing a corporate bond market
Last week Access Bank Ghana organized a seminar that brought together a large gathering of financial industry chieftains to deliberate on one of the most important aspects of Ghana’s capital market but one which is sadly underdeveloped – the bond market. For this Access Bank deserves to be unreservedly commended for its selflessness; even though a developed bond market would reduce the demand for direct lending which provide Access Bank and all its counterparts with inordinately wide interest margins, which indeed are the highest contributors to their profits, Access Bank nevertheless is seeking to promote the development of Ghana’s bond market, because it is crucial to the long term financing of both the public and the private sectors.
This is not a brand new theme-a committee with representation from the Bank of Ghana, the Ghana Stock Exchange, the Ministry of Finance and Economic Planning and private capital market firms has been in place since 2002. However progress has been slow, partly because there is very limited knowledge of the usefulness of a bond market and how it works. In raising awareness among all potential stakeholders Access Bank’s seminar has done a world of good towards speeding up the process of developing a proper bond market in Ghana.
So far, the little progress achieved has been with regards to government treasury bonds. Over the past seven years, government has introduced bonds of two, three and five year tenors, and most of them are listed on the Ghana Stock Exchange. Indeed, most of the emphasis at last week’s seminar was again on government bonds.
To be sure, the development of a market for government bonds has been achieved. All of the medium bonds issued, since their introduction over the past few years have been oversubscribed, with foreign and domestic investors alike buying into them enthusiastically. All that is really remaining is for government bonds with long tenors, of up to 10 years and even more to be introduced, like in neighboring Nigeria whose federal government now issues 20 year bonds. This is a matter of ensuring correct pricing of the bonds and ensuring that there is a liquid secondary market so that investors can confidently buy such long term bonds because they will not lose out when short term interest rates rise, and they can amortize their investments whenever they need cash for other purposes.
Which is why this newspaper holds the view that a lot more emphasis should be placed on developing the market for corporate bonds. So far only three companies have issued and listed corporate bonds on the GSE and between them they account for barely two percent of the total bond listings, which altogether account for less than US$1.5 billion. Compare this with the American bond market which is worth over US$31 trillion of which corporate bonds account for some US$20 trillion.
To be sure corporate bonds are direly needed in Ghana. This is because Ghanaian shareholders, individual and institutional alike are loathe to dilute their equity stakes, to secure much needed long term financing for capital expenditure and expansion and so the companies they own prefer bank loan financing. The snag however is that the banks do not have the long term deposits needed to finance long term loans and so those borrowing companies tend to borrow short to finance long term needs and have to keep seeking refinancing of their debts regularly, sometimes, unsuccessfully.
However, if they could issue bonds they would get the long term financing they so direly need,
But, to successfully issue such medium and long term bonds, which would attract subscription by the investing public, corporations need to engender their confidence. This requires efficiently management of their resources, a proper accounting culture, transparency in their operations, and adherence to debt servicing schedules and repayment periods. But even more importantly, bond issuing companies would be required to use all these attributes to procure good credit ratings. Government’s bond issues are successful because the investment risks are low; corporate bonds carry much higher investment risk and thus investors would require a very good credit rating before having the confidence to take that risk.
These requirements are certainly not insurmountable. All the corporate bonds issued on the GSE so far have been fully subscribed, but that is because they have been issued by blue chip financial institutions such as Standard Chartered Bank and HFC Bank. Non-financial institutions with lesser reputations would find the going much harder. Unless a reputable independent credit rating finds reason to recommend them through favourable credit ratings.
Companies seeking long term financing without diluting the equity stakes of their current shareholders therefore need to seek such credit ratings, which they can only get by good corporate governance, operational efficiency, transparent accounting and a good credit history. But considering that the rewards for this would be longer term financing than what the banks can provide thorough direct lending, and at cheaper cost too, surely, it a well worth the effort.
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