Ghanaian companies squeezed between high rates and bear market

Ghanaian companies needing cash are caught in a dilemma.

Faced with borrowing costs at a 13-year high, companies including the local unit of Diageo Plc and Ghana Oil Co. are turning to the stock market to raise record amounts of capital as they try to reduce debt. They could hardly have chosen a worse time.

The West African nation’s benchmark stock index is in a bear market, having fallen to a three-year low as a plunge in oil prices and power shortages weigh on economic growth. That makes the share sales a bargain for investors – and a welcome injection of cash for the stock market – but a raw deal for the sellers, according to African Alliance Securities Ltd.

“Ideally, I wouldn’t want to raise capital in this kind of environment,” Derrick Mensah, a senior analyst at African Alliance, which rates Ghana Oil “accumulate,” said by phone from Accra. “If it weren’t for the interest rates, they probably wouldn’t need to raise capital at this point. It makes it difficult.”

Guinness Ghana Breweries Ltd., a unit of Diageo Plc, and Ghana Oil together have sold 353 million cedis ($90 million) in rights issues, while UT Bank Ltd. and the Ghanaian unit of Societe Generale SA are planning to raise at least 241 million cedis. That would be the most in a year since the Ghana Stock Exchange started operating in 1990. The bourse, West Africa’s second-biggest, has 35 listed companies and a market capitalization of 50.6 billion cedis, according to data compiled by Bloomberg.

Currency Slump

Ghana’s central bank raised its policy rate four times to 26 percent last year as the currency slumped by more than a third against the dollar in the first half. With rates at their highest since July 2003, companies are pushed to cut borrowing and look for cheaper funds.

Guinness Ghana will use the funds it raised to pay a portion of a loan from its parent and some foreign currency debt. Ghana Oil will reduce its gearing to 61 percent, from 81 percent in June 2015. Still, companies are being forced to sell their shares cheaply.

The Ghana Stock Exchange Composite Index has lost 10 percent this year amid slowing economic growth while investors are being drawn to high interest-bearing securities, according to Ecobank Capital Ltd. The country last month revised its 2016 growth forecast to 3.2 percent, the lowest since a contraction in 1983.

“The fixed-income space is posing a threat to the equity market,”  Randy Mensah, head of equity trading at Ecobank, said by phone from the capital, Accra. “The fixed income market, treasuries are offering higher yields.”

Ghana Oil priced its shares at a 18 percent discount when it went to the market in May. Guinness Ghana offered its stock at a 3.2 percent discount in the same month after the shares had already fallen 3.7 percent since the beginning of the year.

Fixing Balance Sheets

The share sales will at least allow companies to fix their balance sheets, Karl Ocran, head of investments at Frontline Capital Advisors Ltd. in Accra, said by phone.

“It’s only prudent for them to resort to equity financing,” he said. Interest rates have “moved northwards, and so using a rights issue is an opportunity to restructure their capital.”

UT Bank plans to start an offer early August for at least 200 million cedis and will use the proceeds to “restructure and refinance certain expensive liabilities and reduce the interest burden,” it said in a circular. The bank has more than 400 million cedis of debt while its capital-adequacy-ratio fell below the mandatory 10 percent, the company said.

“There would be a better appetite for rights if the market sentiment were better,” said African Alliance’s Mensah, who recommends buying Societe Generale Ghana while reducing holdings of Guinness. “Obviously the macro plays a big role.”