The approach of the Ghanaian government and its regulators to \u201cmanaging\u201d struggling banks in Ghana has evolved yet again.<\/p>\n\n\n\n
From majority state-owned \nbanks doing \u201cpurchase and assumption\u201d, we moved to \u201cresolution and \nconsolidation\u201d, and now we are on the cusp of state-directed, privately \nfinanced, transactions to \u201csave\u201d solvent but capital non-compliant \nbanks.<\/p>\n\n\n\n
Instead of the Government \nbearing the full brunt of the financial cost of salvaging or supporting \nstruggling local banks, it is trying to induce the private pensions \nindustry to see the locally owned segment of the Ghanaian financial \nindustry as a worthy investment prospect and go to its rescue.<\/p>\n\n\n\n
It is curious that private \npension schemes on their own could not see the ripe opportunities in the\n financial sector, if indeed they exist, on their own, and that it had \nto take the Finance Ministry to impel them to band together for this \n$420 million shopping spree for banking assets. Is this impulse buying \nor serious strategic thinking?<\/p>\n\n\n\n
If $420 million is required\n to ensure that the 5 locally owned banks meet the minimum capital \ndirective of $84 million per bank, then it is reasonable, without more \nspecific information, to assume that the Special Purpose Vehicle being \nset up to enable the pension funds to invest in the industry is likely \nto own the majority stakes in these banks, and also that capitalisation \nshall exceed the minimum regulatory threshold. Of course, some of the \nmoney being raised will probably go into margin reserves to service the \ndebt itself.<\/p>\n\n\n\n
First question: can the private pension schemes afford to bankroll these banks? Do they have the muscle?<\/p>\n\n\n\n
With roughly $2 billion \nassets under management, and annual growth exceeding 15% over the last \nthree years, the private pensions industry as a whole in Ghana looks \nrather muscly.<\/p>\n\n\n\n
The OECD Global Pension \nStatistics database suggests that cash and deposits constitute nearly \n20% of holdings, which would suggest deployable resources of nearly $400\n million, just about the amount needed to execute this transaction the \nFinance Ministry is trying to foist on the industry. The only problem is\n that the OECD database covers public pensions as well, making it less \nuseful for this analysis. What about local databases?<\/p>\n\n\n\n
Sadly, in the usual spirit \nwith which public agencies do their jobs, the current NPRA is barely on \nits feet. After an inexplicable delay of 20 months, the Board of the \nmain pension regulator was finally constituted in late August of last \nyear. The Agency has failed to release even its annual report to the \npublic since 2015. In short, local statistics are hardly of any help.<\/p>\n\n\n\n
Thus, for me to attempt to \ncontribute my small morsel of analysis to help answer the questions \nabout the industry\u2019s strength, I had to pull up the latest annual \nreports of the top 5 pension schemes in Ghana (with 80% plus of market \nshare) and try to piece together the picture for myself! The price \ninquisitive people have to pay in Ghana<\/p>\n\n\n\n
From my analysis, the most \nliquid assets of the private pension schemes make up about 2% of total \nholdings. This would suggest that the industry\u2019s ability to provide \nactual liquidity immediately is limited to about $40 million! Luckily, I\n am engaged in what is obviously poor interpretation. To properly come \nto grips with the issue, I do have to take into account relatively liquid assets that can still be brought to bear on the situation if necessary.<\/p>\n\n\n\n
I refer to the holdings, of\n these private pension trusts, of short-term securities (money market \ninstruments and treasury bills, in particular). Due to the strictness of\n the pensions law, and its subsidiary regulations, Ghanaian pension \nfunds are heavily invested in moderately liquid assets of this nature. \nRoughly 80% of their assets are in this class. What this means in short, is that if push comes to shove, they can sell these assets and raise up to $1.5 billion in a few months, if not weeks<\/p>\n\n\n\n
But that would require a \nchange in the law, which forces them to maintain their current \ninvestment posture. At present, the law does not allow them to invest \nmore than 5% of their funds in \u201ccollective investment schemes\u201d. And, \nstrictly analysed, the Ghana Amalgamated Trust (GAT) concept IS INDEED a\n collective investment scheme in the meaning intended clearly under \nGhanaian securities law.<\/p>\n\n\n\n
If this conservative \nposture were to be adopted, the pensions industry would be barred from \ninvesting more than $100 million in the banks through direct \nparticipation in the GAT. But I think I see the \u201ctrick\u201d the Finance \nMinistry wants to use<\/p>\n\n\n\n
I suspect, from parsing its\n terse press release, that the Ministry wants to force-fit the GAT \narrangement into the current statutes by fabricating a \u201ccorporate bond\u201d \non behalf of the GAT entity to the tune of $420 million and then \ninviting the pension funds to subscribe. Because the law allows the \nschemes to invest up to 30% of their funds in corporate bonds, this \ncould, in theory, immediately make $600 million available for this GAT \nventure!<\/p>\n\n\n\n
It is a sly move. But risks remain.<\/p>\n\n\n\n
The pensions funds would \nhave to divest a significant portion of their current investment in \ntheir main asset categories in order to invest in this bond issued by \nthis amorphous GAT vehicle, trusting the government of Ghana to \nconstitute the entity properly with truly independent and competent \ndirectors and managers. At any rate, the investment regulations also bar\n pension schemes from assuming ownership of companies in which they \ninvest (it is unlikely then that the law would permit collusive \nownership by a group of pension funds) so full trust in Government\u2019s \nbest intentions is critical. What would be the impact on the securities \nindustry broadly as a result of such a divestment anyway?<\/p>\n\n\n\n
The above analysis focuses \npurely on technical and legal feasibility, but what about commercial \nsense? Should pension schemes increase their allocation to corporate \nbonds by a multiple of more than five (i.e. 500%+) simply because the \ngovernment says they should? And even if liquidity is being promised \nthrough a primary listing of the bond on the three-year-old, presently underwhelming, Ghana Fixed Income Market (a Ghana Stock Exchange platform), should the Trusts be so trusting?<\/p>\n\n\n\n
The commercial decision to \nplace more than 20% of current tier one and two pension funds in local \nbank equity as an asset class is likely to be taken with extreme care as\n it represents a radical departure from how pension funds have been \nmanaged in Ghana to date.<\/p>\n\n\n\n
Currently, the best \nperforming pension scheme managers are receiving compensation (fee \nincome) of less than 1% of total funds under management. These fees are \nbeing generated on the back of investment returns in some key investment\n vehicles exceeding 20% per annum. The appetite of pension fund managers\n for risky, low yielding, instruments must be very low.<\/p>\n\n\n\n
Would the GAT bonds offer \nyields far exceeding 20%? If not, why would any pension scheme want to \ninvest in these relatively riskier assets for a modest spread when their\n current conservative investing strategy (allocating 80% or more of \ntheir funds to short-term government and money market securities) is \nalready returning 20% plus per annum?<\/p>\n\n\n\n
The government\u2019s press \nrelease on the transaction appears to suggest that GAT shall offer the \n$420 million to these banks as equity, not as convertible debt (it is \nunclear that convertible debt would meet the regulatory requirement \nanyway), and that the subscribers of the GAT bond (the ultimate \ninvestors that is) \u2013 the pension funds \u2013 would be aiming to derive their\n returns through capital gains on the Ghana Fixed Income Market as \nopposed to a reliance on the yields on the bonds. Unfortunately, trading\n on the GFIM has been much too thin to really provide any serious \ncomfort, though I should probably dig deeper into this.<\/p>\n\n\n\n
Clearly, then, we are back \nto the yields on these bonds, which, on the surface analysis of the \nrisks, should be yielding about 30% to really make sense. But if GAT \nshall be issuing such a high-yield bond as its source of capital to \ninvest in these banks, and capital gains appreciation on the country\u2019s \nanaemic fixed income bourse is infeasible as a strategy, then the \nquestion becomes: will the five local banks show the Return-on-Equity \n(ROE) needed to support the dividends the GAT shall require to pay the \ncoupons and finally redeem the bonds? Recall that for most of them their\n asset base shall be expanding by roughly 4x post-investment. \nTraditionally, higher ROE on an expanded asset base is very hard to pull\n off even for seasoned managers, especially in the short term, which is \nprecisely the reason why some of us were so critical about the minimum \ncapital directive in the first place.<\/p>\n\n\n\n
Or is all this, as the \nclever Patrick Stephenson insists, \u201cbalance sheet transactions\u201d with \nvery little actual liquidity expected to move around?<\/p>\n\n\n\n
It is disappointing that, \nonce again, the debate on this whole process is so stifled, and official\n information so bereft of depth. As with many things in Ghana we are \nforced to leave everything to time.<\/p>\n","protected":false},"excerpt":{"rendered":"