I recently chanced on a report published by the Ghana Fixed Income Market dated January 2021 as well as the December 2020 monthly bulletin from the Central Securities Depository providing some useful information on the domestic capital market.
I further delved into how the corporate bond market has performed over the years and if there were lessons, we could pick to further develop and strengthen the market. There were Nine (9) Corporate Issuers with a total shelve registration of Ghs17.6bn. Out of this amount, ESLA PLC which had a shelve registration of Ghs10bn and Daakye Trust PLC with a total issuance of Ghs5.5bn accounted for 56% and 31% respectively, controlled the biggest market share.
Out of the Ghs17.6m proposed issuance, only 58% representing Ghs10.2bn had been raised and trading actively on the secondary market. In fact, on a year on year perspective, the total outstanding corporate securities had declined by 7% to Ghs9.12bn due to lack of issuance by Edendale Properties Ltd.
Comparing above analysis to our peers in the Africa sub-region like Nigeria, Kenya and South Africa, there is the need to raise the awareness and educate Corporate issuers to explore the domestic Capital Market to raise funding. In this article, efforts are made to briefly explain the roles and responsibilities of players involved in the domestic capital market with focus on Corporate issuers.
Why the need to issue Corporate Bonds
There are several ways a company can raise funding to support its operations, one of them is to issue fixed income securities. Corporate bonds could simply be defined as long-term debt securities issued by corporate clients in order to raise finance for a variety of reasons, from enhancing their capital structure, building facilities and purchasing equipment to expand their businesses.
Corporate bonds are usually characterised by higher yields than government bonds because there is a higher credit risk of a company, due to various idiosyncratic risks, compared to government securities (which is usually seen as a risk-free asset). They, however, can also be the most rewarding fixed-income investments because of the risk the investors must take on. A corporate’s credit quality is very important as the higher the quality, the lower the interest rate the investors receive (the risk/reward ratio).
Starting the Issuance journey
There first step is to ensure that you the issuer has obtained the necessary approval from procurement and regulatory bodies. Below are some potential steps that go ahead of an issuance:
- An expression of Interest (EOI) (optional; dependant on each Issuer’s procurement rules) may be issued to ascertain potential Arrangers/Legal Counsel/other Third Parties who meet a minimum list of requirements needed to act as a potential Arranger;
- Request for Proposal (RFP) inviting prospective financial institution and investment firms to put in their bids for various roles such as Joint Lead Manager (JLMs) as Transaction arrangers and/or advisers
Depending on each Issuer’s likely frequency to issue Notes, it may be recommended that Corporate Issuers consider a comprehensive Medium-Term Note (MTN) Programme. With the MTN programme approach, issuers can always go back to the market to raise additional funding under the same note Programme. For instance, Issuance from ESLA PLC, Daakye Trust Plc, Bayport Savings and Loans were all issued under a programme.
The need for Joint Lead Managers/Bookrunners
The Arranger has a pivotal role in the issuance of the debt into the market and will be expected to take the lead on every aspect of the transaction. The issuer will need initially to be advised as to the viability of an issue, likely size, market conditions and timing, and liaise with investors to gauge interest for the Issuer.
There may be little appetite in the market for such debt or the likely pricing of such an issuance may be too high – these will be matters on which the arranger can advise. The decision whether or not to proceed with the issuance will be guided by the Arranger(s) view.
The bookrunners on the other side serve as lead underwriter and usually work with other JLMs to establish an underwriter syndicate, thereby creating the initial sales force for shares. So, in effect, the JLMs are responsible for arranging the bond issue and managing the entire issue process, advising the issuer on the structure and timing of the issue.
There are two types of bookrunners, an Active Bookrunner and a Passive Bookrunner.
- The Active bookrunner will be a group of banks designated by the issuer to place the issuance. They are responsible for keeping the investor order book and determining the final assignment to each investor, and for keeping the documentation for the issue, which they usually entrust to an external legal advisor. They also organize calls with investors and accompany the issuer on the roadshow
- In the case of a Passive bookrunner: while not actively involved in placing the bond, and therefore not having access to marketing of Notes; they are included, normally as relationship banks of the Issuer, and usually receive a small fee for their role. JLMs charge a fee for their roles in the issuance process.
Major JLMs I have seen over the years supporting in domestic issuance include the likes of Standard Chartered Bank Ghana PLC, Fidelity Bank, Temple Investment and Databank.
ALL CORPORATE BOND LISTINGS DONE ON THE DEBT MARKET SINCE INCEPTION
|Issuer Name||Amount Raised (Ghsm)||Shelve Registration (Ghsm)|
|Izwe Loans Ltd||80.00||80.00|
|Edendale Properties Ltd||32.65||50.00|
|Bayport Financial Services||349.68||500.00|
|Ghana Home Loans||19.00||380.00|
|Bond Savings & Loans||70.40||100.00|
|Quantum Terminal Ltd||45.00||140.00|
|Dalex Finance Company||20.00||150.00|
|Daakye Trust PLC||1,392.58||5,500.00|
Source: Ghana Fixed Market Report, January 2021, p.6
While the JLMs structure the issuance process, the co-managers will be assisting to sell the bonds to local investors and can provide an additional distribution network for the issuance. This is a role that issuers give to entities with which they have some form of cross sell commitment. They do not perform a primary distribution function on the issuance but are critical for the Issuer to retain for relationship purposes. Consequently, they receive much lower fees. A sponsoring Broker acts as an advisor that arranges the details of bonds ensuring that the necessary compliance and listing regulatory requirements are met.
Special Purpose Vehicles (SPV), are they important?
The roles SPVs are playing in corporate issuance is increasing becoming very important and good for market development. An SPV, also called a Special Purpose Entity (SPE), is a subsidiary created by a parent company aimed at isolating financial risk. It`s legal status as a separate company makes its obligations secure even if the parent company goes bankrupt.
An SPV is created as a separate company with its own balance sheet etc. It may be used to undertake a risky venture while reducing any negative financial impact upon the parent company and its investors. Again, the Energy Sector Levy Act Bond programme was issued through ESLA PLC and the GETFund Bond Programme was issued via Daakye Trust PLC as SPVs, respectively, in view of the complexity of these structures.
Leveraging on the expertise of the SPV to manage their bond issuance. The key focus of these SPVs is to hold the company to the securitization of debt. SPVs may be suitable for State Owned Enterprise etc who may have the desire to access the domestic capital markets.
Bond Trustee/Account Paying Banks
Bonds constituted by a trust deed will have a trustee, who will also have a range of other duties, including representing the interests of the bondholders and the issuer’s main agent will be the paying agent. If the bonds are not constituted by a trust deed, the issue will not have a trustee,
Local bond issuances require a duly licensed ‘Bond Trustee’ to represent and act in the interest of bondholders. There are times investors want to be sure of the safety of their investments. Some of the key responsibilities, generally, includes monitoring cash flow and instructing paying bank to transfer coupon payment ahead of pay-date.
The Trustee also calls for bond holders’ meeting after the issuance. Since there are some covenants at primary issuance, the trustee ensures to tracks Debt Service Coverage ratios. There is the need to have passive oversight on bond issuance process and program. The Trustee also ensures to submit periodic reporting to the local regulator(s). Currently, there are seven (7) Licensed Trustees according to the Securities and Exchange Commission (SEC). Corporate Issuers can engage a Banks Standard Chartered Bank Ghana PLC that has rich experience both on the domestic and International Debt Capital Market for this service.
The need for Corporate Managers cannot be understated. They act as the administrator of the Issuer for the purpose of providing management and supervisory services to the Issuer, pursuant to the Management Services Agreement or such other person as may be appointed in accordance with the Management Services Agreement
Paying agents are financial institutions that act as the agents of the issuer in making payments of interest (coupons) and principal to the bondholders throughout the life of the bonds. These commercial banks will ensure that they receive proceeds, manage collections accounts, paying noteholders, Debt Services Account and Debt Service Reserve Account services.
Auditors and Reporting Accountants
The role of auditors remains extremely significant. The issuer’s auditors need to be informed of the bond issue and provide comfort letters to the managers at signing and closing. This also gives some level of comfort to the transactions. Though there are several auditing firms, the top 4 firms are usually seen in various transactions acting as reporting accountants or auditors.
Lawyers/ Legal Counsel
A Legal Counsel need to be appointment to support the issuance process. The issuer and lead manager instruct lawyers to draft the documents (usually the lead manager’s lawyers), comment on the drafts and prepare the legal opinions. Usually, the Issuer appoints its own Transaction adviser and the Managers also appoint their Ghanaian Legal Adviser. They advise on local laws, selling restrictions and regulations.
The likes of Bentsi-Enchill, Letsa & Ankomah, EnsAfrica etc are also available to act as transaction adviser. All domestic issuance is mostly guided by Ghanaian laws. However, when issuers anticipate international investors may buy the securities, the documents must have an element of English law.
Registrar/Transfer agent/Calculation agent.
Ideally for any registered bonds, a financial institution would have maintained a register of the names and addresses of registered bond owners and any change in ownership when bonds are sold. However, Central Securities Depository (CSD) has the sole mandate to be the registrar Transfer agent or Calculation agent. CSD makes certain calculations under a debt security for the process. It is important to mention that, debt securities, no longer issued in the definitive form (in paper certificates) are represented by global securities which are held in the CSDs. For the case of Eurobonds and others, either Euroclear or Clearstream will be the two principal CSDs that will settle such trades.
Bonds need to be listed. Unlike Eurobonds which are listed on the London Stock Exchange or Iris Stock Exchanged, Domestic Bonds may be listed on the Ghana Stock Exchange. The listing agent advises the issuer on the procedure for listing and submits the documents for listing to the relevant stock exchange.
Credit Rating Agencies, are they important?
Although not actually direct participants in the debt capital markets, the credit rating agencies (Moody’s, Standard & Poor’s, and Fitch) can be said to be among the most influential entities in the financial world. There is no dedicated rating agency in Ghana now. What a rating agency will do is that, it assesses the financial position, risk and creditworthiness of an issuer and assigns a rating to its bond issue. Ratings give additional comfort to potential investors and can bring down the coupon rates. It is good that a working committee is going through discussion to establish and internal rating agency in Ghana to support domestic debt issuance.
In summary, understanding the roles and responsibilities transaction parties play is a function of a successful debut Issuance. Let`s all help to develop the local market to reach international standards.