By Priscila Azevedo-Rocha and David Graves
On a cold October afternoon in London, the Government of Mozambique’s 2023 bondholders shuddered as the value of their bonds collapsed by over 20 points after a meeting with the sovereign’s advisers. At the meeting, Mozambique’s advisers at Lazard and White & Case told bondholders to engage in talks for a potential debt restructuring, sources told Debtwire.
Just three months later, Mozambique confirmed a rare sovereign default ahead of a $59.7 million coupon payment date for the 2023s, due on January 18. “The upcoming interest payment on the notes […] will not be made by the Republic,” the statement read, adding that “the deteriorating macroeconomic and fiscal situation has severely affected the country’s public finances.”
The bondholder committee considers a restructuring premature, as negotiations remain conditional on progress of a new IMF program and results of an international independent audit.
In a press release, the group qualified the default as unnecessary and strategic. “This development is a retrograde step for the prospects of Mozambique engaging in good faith negotiations with bondholders”, it reads.
Mozambique, once considered a “donor darling” in the eyes of the international community, has seen its public debt rise to 130% of GDP in 2016, keeping trading desks on high alert for the impact upon sovereign debt markets. Its major bondholders include US-headquartered funds such as AllianceBernstein, Greylock Capital Management and Franklin Templeton Investment Management Ltd (UK).
Waiting for the IMF to move
The IMF concluded its most recent mission to Mozambique on December 12, but a resumption in financing relies on the Fund’s board of directors’ approval. Once – and if – green-lit, the program is likely to be in the form of an Extended Fund Facility, the size of which would probably be expanded beyond the previous program, a source close to the government told Debtwire.
But the IMF will only agree to such a program if it deems Mozambique’s debt sustainable with “high probability” – which will require a painful restructuring process, the same source said.
Board approval will almost certainly only happen after the conclusion of an independent audit, currently being conducted by Kroll and scheduled to take 90 days from the start of November, into the $1.4 billion of hidden loans including $1.14 billion raised by Proindicus and Mozambique Asset Management (MAM) from Credit Suisse and VTB, respectively. Their discovery caused the IMF to postpone funding last April.
Both debt obligations have since been partially sold down to other investors, with Portuguese lender Millennium BCP holding some of the MAM loan, and the Proindicus loan offloaded to at least 10 other financial institutions. Crucially, these loans were backstopped by guarantees from the Mozambican government, which were not legally approved by the Parliament, and now recognized as part of the government’s external debt.
A statement from the Fund says that Mozambique’s macroeconomic environment has improved as the metical appreciated 8% vis-à-vis the US dollar since end-September, after a 40% depreciation during the first nine months of 2016. However, budget financing remains limited as foreign donors are still very wary on providing financing.
Upcoming liquid natural gas (LNG) projects could be a potential game-changer for the country’s economy, as investments at Rovuma’s basin onshore Area 1 and offshore Area 4 will attract significant flows of international capital. However, despite these positive GDP developments in the medium-term, the IMF report states that “growth has declined in 2016 and is now projected at 3.4% (down from 6.6% YoY) and inflation, which is expected to peak soon, is still high.”
Next steps
Any concrete restructuring proposal from the sovereign side will come after the IMF has produced an updated Debt Sustainability Analysis for Mozambique, in order to establish a justifiable debt target for the country to aim for via restructuring, according to the government source. And although nothing has been decided yet, there is a strong chance that commercial creditors will be asked to take a face-value haircut.
According to Charles Blitzer, former IMF official and restructuring expert who was hired as advisor to the bondholder committee, “no negotiations have taken place” as many hurdles still need to be cleared before making any decisions on the path negotiations will take. "For instance, sovereign debt restructuring never precedes disclosure of the details of an IMF program and a complete debt-sustainability analysis based on the program,” he said.
“We are looking at following long-established best practices on sovereign debt restructuring,” he added, clarifying that the committee doesn’t want bilateral government creditors to be considered exempt from restructuring, as are the multilaterals, apart from the agreement on an official IMF program and the complete international audit made public for review.
However, one London-based bondholder said he was not convinced Mozambique would end up agreeing to a new IMF program in the end, noting that the country may not be willing to concede to the level of transparency the Fund requires. However, this would not necessarily be a catastrophe for the country, he said.
Foregoing the IMF’s debt sustainability requirements – and the subsequent loss of concessional funding – would potentially force the country to keep the international capital markets open, continue payments on the 2023s, and be honest with commercial creditors.
If the amortisation payments on the MAM and Proindicus loans were rescheduled and the country maintained access to capital markets, the situation could remain manageable until the gas mega-projects come online in around five-year, the bondholder said.
Moreover, the country is in an improved balance of payments position due to currency appreciation recently, he continued. One avenue that might be explored is the issuance of local currency debt to international investors in order to deal with any imminent cash flow issues, he said.
Priscila Azevedo-Rocha is a London-based reporter for Debtwire, where she covers Sovereign Debt and Development Finance Institutions across Central Eastern Europe, Middle East and Africa. She can be reached at priscila.rocha@debtwire.com.
David Graves is senior reporter at Debtwire, based in London, where he covers restructuring across Central Eastern Europe, Middle East and Africa. He can be reached at david.graves@debtwire.com.
