Finance and capital market expert, Dr. Sam Mensah, has expressed worry about the impact of the debt exchange on service providers such as trustees, custodians, and fund managers.

According to him, the ‘haircut’ applied to bond investments will hurt the financial sector significantly

In a write-up dubbed “The Bond Exchange and Further Matters Arising”, the former Financial Sector Advisor at the Ministry of Finance said the exclusion of pension funds in the debt exchange partly avert the looming disaster in the financial sector.

 “Let us assume that you have a ¢100,000 portfolio before the debt exchange. After the exchange, the coupon drops to zero and maturity is extended, which reduces cash flow. Therefore, the price of the bond falls.  The market estimates that a typical portfolio will lose 30-40% of its value when it is exchanged. Therefore, your once ¢100,000 portfolio is now valued at ¢60,000. This is the basis on which the unions [labour] were fighting the bond exchange. Tier 2 and 3 pensions would've been decimated”.

“Let's also look at the impact on the service providers. These include trustees, custodians, and fund managers. All the service providers earn fees calculated as a percentage of the value of assets under management. If the value of these assets drops by 40%, revenues of the service providers will also drop by about 40%", he explained.

Many of the service providers will go out of business because of their inability to cover overheads. Others will have to lay off employees.  At the last count, there were 25 corporate trustees, 39 pension fund managers, and 17 custodians. A whole industry may be at risk”, he added.

Continuing, he said this disaster may have been partly averted by the exclusion of pension funds in the exchange, but the exclusion is problematic.

“How do we meet the International Monetary Fund’s debt sustainability targets if pensions (which now hold 25% of government bonds) are excluded? Clearly, there has to be some give and take so that pensions will participate. Otherwise, we can say goodbye to the IMF agreement. Taking a national perspective, it's premature to celebrate the exclusion of pensions”, he concluded.