Mozambique bondholders say debt relief plan is back to front

Investors holding most of Mozambique’s Eurobonds say the way the country is tackling efforts to restructure about $2 billion in debt is the wrong way round.

The southeast African country’s government is attempting to clinch a deal with creditors before completing an audit into about $1.4 billion of loans that were uncovered in April or negotiating an aid package with the International Monetary Fund. Bondholders want those elements in place before starting talks, but the finance ministry said Monday the audit wouldn’t “alter the quantum of debt needing to be treated,” and that delays to the proposed restructuring would make a difficult situation worse.

“I’ve never seen a country contemplating a restructuring attempt to put the cart before the horse in this way,” Charles Blitzer, a Washington-based consultant advising investors holding more than 60 percent of Mozambique’s $727 million Eurobonds maturing in 2023, said Sunday. “It’s rather unusual — if not unprecedented — to ask for debt relief negotiations before full information is provided and the outlines of the IMF program are in place and available to creditors.”

Mozambique told creditors Oct. 25 it can’t afford to service external debt, which it forecast to reach 130 percent of gross domestic product by year-end, from 40 percent in 2012, and needed to reorganize the loans. It proposed reaching an in-principle deal with creditors in December, and putting in place a debt resolution plan before January, when a $60 million coupon payment for the Eurobonds is due.

A refusal by bondholders to sit down to negotiations until after Kroll Inc. has completed an audit of the undisclosed loans and terms are agreed to with the IMF could lead to Mozambique defaulting, Anne Fruhauf, an analyst at Teneo Intelligence, said Nov. 11 in reply to e-mailed questions. New York-based Kroll has until early February to complete its investigation.

“This strategy is quite a gamble for the bondholders as I don’t think the government is prepared to make a bond payment in January,” Fruhauf said from New York. “A default would confirm that Mozambique, a once promising frontier market, is moving from bad to worse.”

The government has no capacity to pay external commercial creditors next year, the finance ministry said in a statement on Monday. It saw “no basis for distinguishing between different holders of commercial” debt and would treat all of them equitably, the ministry said.

Blitzer’s clients, which include AllianceBernstein, Franklin Templeton Investment Management, Greylock Capital Management, NWI Management and Pharo Management also want Mozambique’s foreign-government and foreign state-owned company creditors to be part of the debt reorganization. A presentation Finance Minister Adriano Maleiane made to creditors last month showed his government was seeking talks only with banks and investors.

“With regard to inter-creditor equity, the notion that you go only to your commercial debtors is just not accurate,” Blitzer said. “Attempting to elevate the status of bilaterals is without precedence. Burden sharing has to include the bilaterals and recognition of the considerable cash-flow relief already granted by the bondholders.”

Overtaking Venezuela

Mozambique announced its restructuring plans about seven months after it re-packaged almost $800 million in debt taken on by a state-owned tuna fishing company into a longer-dated Eurobond. It’s again seeking relief from creditors after its currency plunged 37 percent this year, pushing up the costs of servicing its dollar debt.

The bonds fell to a record low of 56.16 cents on the dollar after the government’s October announcement, and were trading at 60.75 cents on Monday. Yields on the sovereign securities at one point soared by more than 900 points to almost 25 percent, overtaking Venezuela’s to become the highest in the world.

VTB Capital, which helped arrange the Eurobonds and a $535 million loan to state-owned Mozambique Asset Management, said it is continuing talks with the government and its advisers.

“We have consistently maintained our openness to a constructive dialog with them with the aim of reaching a settlement that meets the conditions imposed by the IMF for debt sustainability and, more importantly, avoids making the financial situation worse for the government of Mozambique,” the Moscow-based bank said in reply to e-mailed questions.