US$60m guarantee collapses VFEX Govt bond listing

In its latest debt report Treasury said the issuance of the US$200 million bond on the Victoria Falls Stock Exchange (VFEX) was not successful due to a high face value for the bond and lack of appetite.

“The issuance of Treasury bonds on the Victoria Falls Stock Exchange (VFEX), was not successful due to the limited appetite by potential international subscribers and the high cost of the bond guarantee fee of 30 percent of the face value of the bond,” Treasury said in its debt report.

It comes after the Africa Export and Import Bank (Afreximbank), said the bond should be guaranteed at 30 percent meaning a payment of US$60 million for insurance since we are a high-risk country.

A guaranteed bond is a bond that has its timely interest and principal payments backed by a third party, such as a bank or insurance company, which was Afreximbank in our case. The guarantee on the bond removes default risk by creating a back-up payer in the event that the issuer is unable to fulfil its obligation.

In a situation whereby the issuer cannot make good on its interest payments or principal repayments, the guarantor would step in and make the necessary payments in a timely manner.

The news comes after the Finance, Economic Development and Investment Promotion Minister, Prof Mthuli Ncube in 2023, had said the approval process was going into the final stage.

“Great progress has been made pertaining to the launch of the US$200m bond at VFEX. The guarantor for the fund has approved to support the structure so as to improve the credit standing of the fund and really lower the risk on the fund. Investors should be happy the approval process is going to its final phase so expect that certainly by year-end, we would be able to have raised the US$100m. So, it’s underway,” Mthuli said in July 2023.

“This is only just the beginning and going forward the Government will be launching additional bonds.

We also expect other public sector entities to do the same on the back of a Government guarantee.”

Economist, Gladys Shumbambiri-Mutsopotsi, said bonds have an inherent risk of default, as the issuing corporation or municipality may have insufficient cash flow to fulfil its interest and principal payment obligations.

“This means that a bondholder loses out on periodic interest payments and in the worst-case scenario the issuer defaulting may never get their principal back, either. To mitigate any default risk and provide credit enhancement to its bonds, an issuing entity may seek out an additional guarantee for the bond it plans to issue, thereby creating a guaranteed bond.

“In a situation whereby the issuer cannot make good on its interest payments or principal repayments, the guarantor would step in and make the necessary payments in a timely manner.”

Bonds are a crucial tool for Governments to raise funds for capital projects without causing immediate inflationary pressures. Through issuing bonds, Governments can secure the necessary capital while spreading the cost over time.

Such a method allows for large-scale infrastructure and development projects to be financed without the immediate need to increase taxes or cut spending, which can be politically and economically challenging.

Economist, Dr Prosper Chitambara, highlighted the strategic importance of bonds in a country’s development.

“Bonds enable Governments to mobilise substantial amounts of capital required for development projects, thereby stimulating economic growth without exerting undue inflationary pressures.”

He further added; “When managed prudently, bond issuance can help smooth out public sector investment cycles and maintain fiscal stability.”

However, the disadvantages of defaulting on debt repayments are stark, as evidenced by Zimbabwe’s current economic challenges. Defaulting on bonds can severely damage a country’s creditworthiness, leading to higher borrowing costs and reduced access to international capital markets as seen by the lack of appetite by investors to take up the US$200 million bond.

Analyst, Namatai Maeresera said; “Zimbabwe’s experience with debt default has resulted in a significant loss of investor confidence, making it exceedingly difficult for the government to attract foreign investment and finance critical development projects. This has had a ripple effect on the economy, exacerbating fiscal constraints and limiting economic growth opportunities.”

According to the analysts, the country needs to sort itself out and begin paying outstanding debt consistently in order for international bond buyers to be interested or to pay heavy bond guarantees in order to cover future defaults.-ebusinessweekly