Just Back From Maputo, Danske Sees Mozambique Tuna-Bond Solution

  • Danske says government may swap investors into sovereign bond
  • Danish lender expects proposal from Mozambique in early 2016

For all the skepticism about Mozambique’s claim that it can’t meet commitments on $850 million of debt issued by a state-owned fishing company, the biggest bondholder says there is one solution that might be acceptable to investors.

The southern African nation could convert the amortizing notes due in September 2020 for Empresa Mocambicana de Atum SA, or Ematum, into an interest-only sovereign bond with a longer maturity, according to Danske Bank A/S. That would buy the government time and relieve it from making semi-annual payments on the capital amount plus interest until it starts earning billions of dollars from sales of liquefied natural gas, says the Copenhagen-based lender, which holds 5.2 percent of Ematum’s debt, according to data compiled by Bloomberg.

Mozambique, one of the world’s poorest nations, is facing a cash crunch amid a slump in exports of coal, sugar and cotton. The central bank has burned through reserves to protect the metical, which has plunged 35 percent against the dollar this year, the fourth-worst performance globally. That stoked inflation to three-year highs and also forced the regulator to raise its benchmark interest rate by 150 basis points to 9.75 percent this week.

The government hopes that one of the world’s biggest gas discoveries in a generation will transform the country, with Standard Bank Group Ltd. estimating that the economy may swell nine-fold by 2035.

Bullet Bond

“If they made it into, say, a 10-year bullet bond, by that time they would have the gas on stream and they could afford to pay it back,” said Sorin Pirau, an analyst at Danske who visited Maputo, the capital, about two months ago and spoke to multilateral donors and businesses about the debt. “By then, Mozambique will be a different country. My base case is that we’ll see their first move early next year. If I was them, I’d try to do it before the next coupon payment in March 2016.”

The government, which guaranteed Ematum’s bond, has appointed a local investment bank to look at options for restructuring the debt. The International Monetary Fund agreed to give the country $286 million of emergency aid in October, while last month the central bank restricted how much Mozambicans could spend abroad on credit cards in a further bid to bolster the currency.

If Mozambique goes with Danske’s suggestion, the main sticking point may be the new interest rate it offers bondholders. Ematum’s notes, issued in September 2013, have a 6.31 percent coupon. Their yield rose to a record 10.79 percent on Wednesday before dropping to 10.63 percent at 4:33 p.m. in Maputo. That’s more than 320 basis points higher than in mid-June, when Finance and Economy Minister Adriano Maleiane told parliament he wanted to lengthen the tenor and reduce the payment costs.

Default Risk

Ematum bondholders including Danske, Zurich-based Bank Vontobel AG and Allianz Global Investors Europe GmbH, a unit of Europe’s biggest insurer, said they wouldn’t accept a reduction in interest payments. Standard & Poor’s, which rates Mozambique B-, six levels below investment grade, said any attempt to change the maturity or coupon without investor consent would be regarded as a default and may result in a downgrade.

“They have good reason to want to lengthen the bond, but they will have to pay for it,” said Luc D’Hooge, head of emerging-market bonds at Vontobel, which owns about 2.4 percent of Ematum’s debt and bought more as yields rose after Maleiane’s announcement. “They have the capacity to pay. They would suffer massively if they got into legal problems with bondholders. They don’t have much room for negotiation.”

Military Equipment

The bond has already proved controversial. Originally a loan from Credit Suisse Group AG and VTB Capital Plc for the purchase of tuna-fishing boats, it was packaged into so-called loan participation notes and sold to global bond investors. Some of the funds were used to buy defense vessels from a single supplier without a public tender taking place, the IMF said in August. Ematum has yet to make a profit since being set up a few months before the debt was issued.

“The lack of transparency surrounding the project raised serious governance concerns,” the IMF said.

Mozambique has been at peace since 1992, when it ended a 17-year civil war that destroyed its infrastructure. Its per capita gross domestic product of $630 is barely half of Kenya’s and one-tenth of neighboring South Africa’s.

The country’s fortunes may change once its offshore gas fields, the region’s biggest, are developed, probably early next decade. Eni SpA and Anadarko Petroleum Corp. are close to making final decisions about spending the billions of dollars required to tap the fields that Mozambique estimates holds enough reserves to meet global demand for more than two years.

‘Materially Negative’

While the government’s debt is high by sub-Saharan African standards at 60 percent of GDP, servicing costs are relatively low because most of that borrowing is on concessional terms from donors, according to Mark Bohlund, a Bloomberg Intelligence analyst.

It’s for this reason that Ematum’s investors won’t accept losses on their holdings, even if they do agree to swap into a longer-dated sovereign bond.

“This cannot be but a voluntary exchange if it is not to be considered a sovereign default,” said Greg Saichin, chief investment officer for Allianz Global Investors’ $2 billion of emerging market debt. A distressed exchange could hinder Mozambique’s chances of tapping global bond markets again and “would be materially negative for its growth prospects,” he said.

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