• S&P may regard a change of terms as tantamount to a default
  • Yields drop most on record as investors expect coupon payment

Investors seem to love Mozambique’s plan to give them longer-term sovereign debt in exchange for the bonds of a state-owned tuna fishing company.

Now the south-east African nation has to convince Standard & Poor’s, Moody’s Investors Service and Fitch Ratings Ltd. that the offer, aimed at reducing annual interest payments, shouldn’t be punished with a credit rating downgrade. That would heap further pressure on a government facing a cash crunch amid a slump in commodity prices and a collapse of its currency, the metical.

Yields on the so-called tuna bonds fell the most on record after the government offered investors 100 cents on the dollar to accept securities with a longer maturity. S&P said last month it would regard any restructuring that included an extension of maturity as tantamount to a default that may result in a downgrade of Mozambique’s rating of B-, six steps below investment grade. The company lowered Mozambique one level in July. Moody’s and Fitch, which both rate Mozambique one step higher, also downgraded the country in the second half of 2015.

“The rating agencies will scrutinize any deal extremely carefully,” Anne Fruhauf, vice president at New York-based risk adviser Teneo Intelligence, said by phone on Thursday. “They have already made it clear that they are more inclined to see any sort of restructuring as a default. Clearly, the onus will be on the government to convince them it’s an investor-friendly re-profiling.”

Yields on the the $773.5 million of sinkable bonds, guaranteed by the sovereign, fell 2.3 percentage points to 16.85 percent in London on Thursday after dropping 173 basis points on Wednesday. That boosted the price 4.7 percent to 80 cents to the dollar, from 75 cents on March 4, the biggest gain since the debt was sold in September 2013, according to data compiled by Bloomberg. The bonds have lost 1.7 percent this year, compared with the 3.6 percent average gain for emerging-market high-yield sovereign debt tracked by Bloomberg indexes.

The yield fell a further 19 basis points to 16.66 percent as of 10:19 a.m. in London, taking the price to 80.3, the highest since Jan. 13.

“At this stage, it’s an event that may trigger a rating action,” Gardner Rusike, a Johannesburg-analyst at S&P, said in an e-mailed response to questions. “We would like to see all information and the full details government would like to propose regarding the exchange.”

Moody’s didn’t respond to an e-mailed request for comment. Fitch Ratings said in a statement Friday that the restructuring offer “could constitute a distressed debt exchange under the agency’s criteria, which we would consider a default event.”

The maximum price of the new fixed-rate notes to replace the securities of Empresa Mocambicana de Atum SA, or Ematum, will be 80 cents on the dollar, the government said in a statement Wednesday. The new interest-only bonds will be issued by the government and mature in 2023, compared with the 2020 maturity of the existing debt, which is amortizing. Other details, including the coupon, will be announced on March 17. There will be $697 million of debt outstanding once Ematum makes coupon and principal payments due Friday, the government said.

‘Positive Thing’

“The positive thing is that they intend to pay their amortization on Friday -- that’s implied in the announcement,” Kevin Daly, a money manager at Aberdeen Asset Management, which oversees about $11 billion of emerging-market debt, including the so-called tuna bonds, said by phone from London. “It seems that they intend to offer a fair exchange. They need 75 percent consent. They won’t get that if they offer a sub-standard yield.”

Credit Suisse Group AG and VTB Capital Plc are arranging the exchange offer. The bond was originally a loan from the two banks for the purchase of tuna-fishing boats. It was then packaged into so-called loan participation notes and sold to global bond investors.

Mozambique, one of the world’s poorest countries, is struggling as China’s slowdown reduces revenues from raw materials including coal, and the depreciation of the metical, down 36 percent against the dollar since the start of 2015, increases dollar-based debt-service costs. The International Monetary Fund agreed to give the nation $286 million of emergency aid in October.

The government hopes to bolster its financial position over the next decade through gas exports. The development of recently discovered offshore reserves could help turn it into the third-biggest liquefied natural gas exporter in a decade.

That might count for little among the ratings agencies.

“It is inevitable that S&P will issue a downgrade on Mozambique to selective default if the restructuring proceeds,” given that it includes an extension of the maturity, Hanns Spangenberg, senior economist at NKC African Economics in Paarl, South Africa, said in an e-mailed note.

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