In a reactionary move by foreign investors, Ghana’s sovereign dollar bonds dropped sharply on Tuesday after a government presentation of debt rework scenarios that aimed for a haircut of between 30-40% on the principal disappointed investors.

According to data by Tradeweb, some bonds fell to their lowest level in three months, with the 2061 issue down as much as 2.9 cents in the dollar to 38.9 cents. However, the bonds later recovered some ground, though it was still down between 1.5 cents and 2.2 cents in the dollar.

While the exact details of the trade are still missing, an American multinational investment bank and financial services company, Morgan Stanley, said in a note to clients that it has calculated a recovery value of $38 versus the current average price of $44 on the bonds.

“In our view, this proposal is unlikely to be accepted by the bondholders as the ultimate recovery value would be extremely low compared to history,” Morgan Stanley’s Neville Z Mandimika said.

While the Ghanaian government indicated that a value recovery instrument is being considered, Mandimika, however said, “It is important to note that this is only a first proposal and various revisions will likely be made, presumably with a higher recovery value”.

Ghana, which produces gold, cocoa and oil, is in talks with bilateral and commercial creditors to restructure its debts during its worst economic crisis in a generation, having been locked out of international capital markets as it struggles with spiralling domestic debt costs.

Ghana has submitted debt restructuring scenarios to bondholders which include a haircut of 30% to 40% on principal. Apart from the haircut, Finance Minister Ken Ofori-Atta also told investors that the government is aiming for a coupon of no more than 5% and a final maturity of not more than 20 years on the bonds that would be issued as part of the debt rework for its US$13 billion of outstanding international bonds.

Ghana Aiming to Restructure $20 billion

According to a government presentation to investors, Ghana is aiming to restructure $20 billion out of total external debt that was about $30 billion at the end of 2022.

The International Monetary Fund (IMF), meanwhile hopes Ghana will reach a debt restructuring agreement with bilateral creditors within six to eight weeks.

“We are now intensifying efforts with international bondholders and we expect significant progress in the coming week,” Ofori-Atta said at an investors’ presentation, adding that he hoped to conclude discussions before the end of the year. “As a nation, we also want to show the country’s commitment to burden-sharing in debt restructuring,” he added

Ofori-Atta noted that he is opened to any instrument aligning with the IMF’s Debt Sustainability Analysis, including state-contingent debt instruments (SCDIs), which allow for adapting payouts based on varying economic outcomes. “These instruments have been used in previous cases and they could be useful bridges for the gap for creditors with divergent views on the recovery path of our country’s debt,” he said

About $619m of Ghana’s debt with China is collateralized, backed by assets including cocoa, bauxite, and oil, according to the IMF. This puts the country at risk of losing important resources if repayments are called upon, especially if China isn’t willing to make concessions on this. The country therefore, needs to draw the curtain on the external debt issues to help the economy recover.