On January 8th 2025, The Republic of Benin, as part of its proactive debt management strategy, has announced a buyback of its outstanding 4.875% amortizing bonds due 2032.
Initially issued at a total principal value of €700 million, the outstanding amount of these bonds has been reduced to €595.085 million following a previous buyback of €104.915 million in 2024.
With this new buyback, funded by a partially guaranteed loan of up to €250 million, Benin aims to further reduce its liabilities and potentially lower borrowing costs.
The outstanding bonds have an interest rate of 4.875%, which is relatively high by emerging market standards. By repurchasing these bonds with a loan that benefits from a partial guarantee by the International Development Association (IDA) of €200 million, Benin is likely accessing capital at a lower interest rate.
The partial guarantee reduces the risk for lenders, enabling Benin to secure more favorable terms. Over the long term, this could result in significant savings on interest expenses.
Repurchasing fixed structure bonds allows Benin to refinance its debt with instruments that offer greater flexibility in terms of maturity and repayment schedules. This can help the government align debt repayments with anticipated revenue streams, improving liquidity management.
The bonds being repurchased are trading below their face value at €926 per €1,000 of principal plus accrued interest, Benin could retire some of its debt at a discount. This reduces the overall principal owed, further decreasing the long-term debt burden.
Proactively managing debt signals fiscal responsibility to credit rating agencies and investors. Successful execution of this strategy could lead to an improved credit rating, which in turn would lower future borrowing costs and enhance investor confidence.
The issuance of new U.S. dollar-denominated bonds (the “New Notes”) plays a crucial role in the effectiveness of Benin’s buyback as a debt management strategy
The new bonds are intended to provide a portion of the financing for the buyback of the existing 4.875% bonds due 2032.
If the new bonds are issued at a lower interest rate than the repurchased bonds, this reduces Benin’s overall interest burden, making the buyback more cost-effective in the long term.
The new bonds can be structured with more favorable terms, such as longer maturities or better repayment schedules, aligning with Benin’s economic goals and revenue projections.
Taking on a loan to fund the repurchase does not eliminate debt but shifts it. If the loan terms are not significantly better than the repurchased bonds, the financial benefits could be minimal.
The success of the new bond issuance depends on investor demand and global economic conditions. If investors demand higher yields due to perceived risks, the overall cost of refinancing could escalate.
While the strategy aims to lower long-term costs, the simultaneous execution of a buyback, loan acquisition, and new bond issuance could strain Benin’s short-term liquidity.
The loan’s attractiveness is partly due to the IDA’s guarantee. However, the guarantee only partially covers the loan, leaving Benin exposed to risks on the uncovered portion.
The success of the issuance of the U.S. dollar-denominated bonds (the “New Notes”), depends on market conditions and investor appetite for Benin’s debt instrument. If demand is low, Benin may need to offer higher yields, increasing the cost of the new debt.
If executed effectively, the strategy enhances Benin’s fiscal sustainability by reducing interest obligations and restructuring debt under more favorable terms.
Successfully issuing new bonds strengthens Benin’s reputation in global capital markets, potentially leading to easier and cheaper access to financing in the future.
Reduced debt servicing costs free up fiscal resources that can be redirected toward development projects, boosting economic growth.
The buyback and bond issuance are interconnected, as the proceeds from the new bonds help fund the repurchase. Additionally, investors participating in the buyback may reinvest in the new bonds, creating a smooth transition between the two instruments.
The original issue size of the bonds was €700 million, of which €595.085 million remains outstanding after a previous repurchase in 2024. By reducing this further, Benin can reduce its total debt stock and restructure it under better terms
If global interest rates remain stable or decline, Benin can lock in lower borrowing costs with the new U.S. dollar-denominated bonds. This makes it an opportune moment to refinance high-interest debt.
The issuance of new dollar-denominated bonds allows Benin to deepen its presence in international capital markets. This not only attracts a broader pool of investors but also diversifies funding sources.
The partial guarantee of €200 million by the IDA lowers the risk premium for lenders, enabling Benin to secure a loan with advantageous terms that may not have been available otherwise.
Benin invites eligible holders of its 4.875% amortizing notes due 2032 to sell their bonds for cash.
The maximum amount for the buyback, including accrued interest, is €250 million.
Bonds are to be purchased at €926 per €1,000 of principal plus accrued interest.
The original issue amount of the bonds was €700 million, of which €595.085 million is currently outstanding (after a previous repurchase of €104.915 million in 2024).
Benin plans to finance the repurchase with a loan of €250 million, partially guaranteed by the International Development Association (IDA) for up to €200 million.
The loan is expected to be finalized around the settlement date (January 29, 2025).
Benin intends to issue new U.S. dollar-denominated bonds (the “New Notes”) alongside the buyback.
These bonds will be allocated to investors based on market conditions, with priority given to those who participate in the buyback.
The issuance of these new bonds is not guaranteed and will depend on market demand.
Eligibility: Only eligible holders can participate, subject to jurisdictional restrictions (e.g., UK, Italy, France, Belgium, and the U.S.).
Minimum Tender Amount: Investors must tender at least €100,000 in principal value, with additional increments of €1,000.
The offer is subject to various legal restrictions in countries like the UK, Italy, France, Belgium, and the U.S
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