What postponing bonds payment at maturity means for investors

Last month, the government through Bank of Uganda (BoU) gave investors a chance to convert any bonds, which are maturing into other bonds with a later maturity.

It is believed the payments will be due between 2023-2040 as the government suffers from a cash-crunch triggered by the effects of coronavirus (Covid-19) which has squeezed state coffers.

BoU’s Twitter account said, “If you are part of a savings group or are an individual investor and were not contacted about this option, then this move does not affect your investment.”

This move, among other things, caused a stir on social media with some claiming government was broke and expressed fear that it could erode investor confidence and the country’s ability to pay debt. 

Bonds 

For starters, bonds are income instruments issued by governments through the treasury. Bonds work as debt or borrowing instruments for the issuers in this case the government of Uganda (through Bank of Uganda) but also an investment opportunity for the investors. Governments borrow money through a bonds issue. 

In down playing the impact of the government’s move, Dr Adam Mugume, the executive director in charge of research at BoU says, “I think we read the numbers differently, no country in the world keeps away from domestic borrowing and it is always growing. So the holders of securities don’t want government to redeem the paper. Imagine government is paying you 17 per cent after every five years, you can’t get that return from anywhere.” 

Dr Mugume adds, “We had a lot of maturity of over Shs1 trillion in one month and the guys who were holding the paper were interested in rolling over because they are still earning 17 per cent and the coupon is paid every six months.”

According to Dr Mugume, the government had the ability to pay but that could result in squeezing other expenditures. The postponement is beneficial to both the government and the holder of the paper according to him.

Investor confidence

On whether it will affect foreign investor confidence; Dr Mugume explains that no country in the world gives a 17 per cent return apart from Uganda.

He explains, “When government increased domestic borrowing in December and January, we saw pick up by offshore investors holding government paper in excess of Shs1 trillion. This means out of government domestic borrowing, a substantial amount has gone to non residents.”

Mr Keith Kalyegira, the executive director, Capital Markets Authority (CMA), says the biggest investors were given an option of which position they wanted to take. Rolling over of bonds happens from time to time.

“I don’t think it has an implication on our investors; the issue is whether we have the ability to repay, in knowing that our debt to GDP is quite low at 50 per cent. Countries like Zambia are at about 120 per cent, we are not in the danger zone,” he says.

According to Mr Francis Kamulegeya, country senior partner PricewaterhouseCoopers Uganda (PwC), rolling over is not a default but a commercial arrangement where the government borrowed and pushed the debt forward yet the investors are earning their interest.

“The truth is the government needs money and its sources of income are really strained. So they decided that instead of giving investors money and then go borrow from them again, let’s negotiate with the investors on repayment,” he says.

Mr Kamulegeya adds, “If someone said they wanted their money, the bonds are tradable, the government might not give that money back to you but you can go to the secondary market where you might get more or less of what you lent the government.”

On the question of loss of value due to inflation for investors, Mr Kamulegeya explains that the interest caters for the inflation but when the bond matures, you get your principal back and nothing more.

“If government borrows say Shs100b from you for 10 years, after the 10 years they will give you your Shs100b but every year ,you are earning an interest of 17 per cent,” he says.