Mozambique to treat bondholders, commercial lenders same in debt restructuring

One of the world's poorest countries, the southern African nation has seen its currency collapse and its dollar-denominated bonds lose a third in value since April when the International Monetary Fund (IMF) found over $2 bn in undisclosed debt which had not been approved by parliament, and pulled its funding.

The country told creditors at the end of last month its debt position was unsustainable and it had to renegotiate repayment terms if a new IMF loan deal were to be agreed.

"There is virtually no capacity for Mozambique to pay anything to commercial creditors in coming years," said Ian Clark, a partner at law firm White & Case which advises Mozambique on its sovereign debt restructuring.

"It is absolutely inevitable that there will be a restructuring of the commercial debt, including the direct debt and the guaranteed debt," Clark said.

Financing a fishing fleet

The commercial debt at the centre of restructuring efforts are a Eurobond and nearly $1bn of state-guaranteed loans.

The bond was launched by state fishing company EMATUM in 2013 with a complex structure to finance a fishing fleet, but the project was a fiasco with boats now rusting in Maputo harbour.

In April, bondholders agreed to swap the initial issue for a sovereign bond with $727m outstanding in a deal widely seen as investor friendly.

Eurobond holders have formed a creditors' group, but insisted that as they have already accepted one debt swap, other commercial and bilateral lenders should be first to take the additional pain Mozambique plans to inflict.

Mozambique's commercial debt accounts for 17% of its external public and government-guaranteed debt stock, while the rest consists almost equally of obligations to bilateral and multi-lateral lenders, according to a government presentation in late-October.

Total external debt was expected to exceed 100% of gross domestic product in 2017, the presentation showed.

Clark noted that the April Eurobond swap, which extended maturity and increased the coupon, was positive or at least neutral for investors.

The creditors have labelled the deal a "restructuring" while the government deems it a "reprofiling".

"Bondholders have not gone through any sort of distressed restructuring at this stage so they are in the same position as the holders of the guaranteed loans in that respect, and in our opinion inter-creditor equity requires that they will all be treated on an equivalent pari-passu basis in this process."

Bondholders are due another coupon payment in January.

While Eurobond creditors had specified that the group was open only to those holding the issue, Mozambique would like to see all commercial creditors club together, Clark said.

The commercial loans were made to state firm Mozambique Asset Management (MAM) to build shipyards, and to Proindicus, a firm owned by the Ministries of Interior and Defence and the State Security and Intelligence Service, to pay for maritime security projects.

They were arranged by Switzerland's Credit Suisse and Russia's VTB, which also participated in arranging the eurobonds.

Time is running out

Clark said Mozambique was in contact with both banks over the loans.

While the exact shape of a future restructuring was yet to be determined, a repayment of principal in the next five years was "out of the question" and a very substantial interest relief or deferral was needed, Clark said.

"Whether we are going to need anything more than significant maturity extensions and reductions in coupons, or capitalisation of interest and go into nominal haircuts and the like, we don't know that for sure," he said, adding that nothing was "off the table".

Yet time is running out.

Eurobond investors insist they want to wait for the IMF's return to Mozambique and the publication of an international audit into state firms' loans before starting negotiations.

"If you wait to get the IMF back in the country, if you wait to get the financial situation stabilised, countries can end up going into a downward spiral that can become very difficult to control," said Clark.

"We would like to reach an agreement with them by the end of the year and implement that in January - that is extremely aggressive, I fully accept that." 

Tags: africa, bondholders, debt, mozambique
Posted in Africa, Funds, Funds