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Mozambique defaults again on sovereign bond as IMF visit concludes

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The Mozambique government has confirmed that it will not make the second coupon payment on the sovereign bond it sold to investors in April 2016, despite improving economic conditions that bondholders argue could allow Mozambique to start honouring the debt.

The $726.5 million sovereign eurobond, Mozambique’s first, was issued to replace the EMATUM bond notes that were sold in 2013 to fund one of three controversial maritime security companies. The three companies, which also include ProIndicus and MAM, borrowed a total of $2 billion from international investors with government guarantees that had been granted without the required parliamentary approval – leading to calls from Mozambican and international civil society that they should not be honoured.

All three facilities were arranged by Credit Suisse and Russia’s VTB. The $850m EMATUM debt was repackaged as loan participation notes and sold on international capital markets, while the $622m ProIndicus loan and $535m MAM loan were syndicated privately.

An audit of the three companies completed this year by Kroll confirmed that none of the them were making any significant revenue. Mozambique’s finance ministry said in October 2016 that it could not make repayments on any of the loans until at least 2021, and engaged investment bank Lazard Frères and law firm White & Case to advise it on a restructure process.

The holders of the sovereign bond, however – which is supposed to pay 10.5% interest per year, in six-monthly installments – are arguing that they should be treated differently to the holders of the ProIndicus and MAM debt, which has questionable sovereign guarantees rather than being straightforward sovereign debt.

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A statement released by a group of eurobond holders in June emphasised that “the EMATUM loan notes no longer exist. They were extinguished in April 2016 and the Mozambique 2023 Eurobonds were created with a different debtor (the Republic of Mozambique) and substantially different creditors.”

The group, which calls itself the Global Group of Mozambique Bondholders (GGMB), said that thanks to improved economic conditions in Mozambique, the government ought to be able to honour its commitments on the eurobond – particularly if it repudiated the guarantees for ProIndicus and MAM, which the GGBM pointed out have been found to be illegal both by a parliamentary commission and by Mozambique’s Administrative Court.

“As holders of the Mozambique 2023 Eurobonds – which were approved by the Mozambique National Assembly and whose legality is unquestionable – the GGMB looks forward to a timely resolution of Mozambique’s debt situation.”

Mozambique still has explaining to do

The bondholders said in November 2016 that they would not enter restructuring negotiations until the Kroll report was completed and a new IMF programme in Mozambique is in place. Kroll delivered the report in May and a summary was made public at the end of June – but the main finding was that serious questions still remain unanswered.

Celeste Fauconnier of South African bank RMB said on Tuesday that “although this box is now ticked, the $500m of expenditure of a potentially-sensitive nature remains unexplained. We believe that bondholders are seeking more information on the unaccounted amount. More importantly, they will wait to see what a new IMF agreement would entail.”

A 10-day IMF mission to Mozambique is due to conclude on Wednesday. Writing in Zitamar News last week, Anne Frühauf of Teneo Intelligence said that “the inadequate audit results will force the IMF to impose follow-up requirements,” which could include “an assurance from the government that the attorney general’s (PGR) investigation into the controversial debts is well under way,” and “to impose conditions around the broader management of state and public enterprise debt, which still represents something of a black hole.”

Progress on those points could be enough for creditors to start talking with the government of Mozambique about restructuring the debts.

For now there is significant uncertainty over the next steps but the IMF statement which will be released once the Mozambique visit has been concluded will “give guidance on how to restructure and what the best possible options will be for Mozambican authorities,” according to Pieter du Preez, economist at NKC African Economics.

He said restructuring will probably not happen until early next year, adding: “Local authorities still have a lot of explaining to do with regard to $500m that is unaccounted for.”

© 2017, Zitamar Ltd. Reproduction and dissemination prohibited without written permission.

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