Mozambique Rating Cut by S&P, Moody's on Tuna-Bond Restructuring

  • Exchange offer on Ematum bonds may be `tantamount to default'
  • Mozambique set to announce terms of restructuring on March 17

Mozambique’s credit rating was cut by Standard & Poor’s and Moody’s Investors Service because a proposed restructuring of about $700 million of bonds issued by a state-owned tuna-fishing company could be tantamount to a default, according to the firms.

S&P’s rating for the south-east African nation was lowered to CC, 10 levels below investment grade, from B-, the company said in an e-mailed statement on Tuesday. Moody’s downgraded Mozambique shortly afterward to B3 from B2.

“We could lower the foreign-currency ratings on Mozambique to ‘selective default’ if we consider the investors will receive less value than the promise of the original securities, or if we believe the offer is distressed, rather than purely opportunistic,” S&P said. “Once the exchange is completed successfully, we would expect to revise the rating.”

Mozambique said on March 9 it wanted to switch holders of $697 million of state-guaranteed notes issued by Empresa Mocambicana de Atum SA, or Ematum, into a new interest-only bond issued by the government maturing in 2023. The “tuna bonds” are amortizing, with a coupon of 6.305 percent, and have a final maturity of September 2020. Details of the exchange, including the coupon on the new bond, are expected to be announced on Thursday.

Cash Crunch

Mozambique, one of the world’s poorest countries, wants to reduce its annual debt-servicing costs as it faces a cash crunch from the slump in commodity prices. Its currency, the metical, has plunged 35 percent against the dollar since the start of 2015, making it more expensive to pay down its foreign-currency debts.

Moody’s also lowered the rating of Ematum itself three levels to Caa2 from B2, saying the offer will probably “constitute a distressed exchange leading to an economic loss relative to the original promise under the terms of the existing notes.”

Fitch Ratings Ltd., which ranks Mozambique one step above Moody’s at B, said on March 11 that the restructuring offer may be classified as a distressed exchange, which “we would consider a default event.”

Yields on the bonds rose 4 basis points to 16.79 percent by 9:44 a.m. in London. The yield has dropped from a record of 22.47 percent on March 1.

Unreasonable Rush

The new bond, if priced at 80 cents on the dollar, the maximum that Mozambique says it will offer, would probably need to have a coupon of 12.5 percent to “ensure broad present value neutrality,” Stuart Culverhouse, an analyst at Exotix Partners LLP in London, said in an e-mailed note on Wednesday. That would result in a yield of about 16.5 percent.

Exotix, which recommends clients buy the Ematum securities, said it was surprised by the exchange offer and thought the government would abandon the idea after announcing it was thinking of a restructuring in June. After that, Mozambique went silent on the tender, according to Culverhouse.

“Then to give investors just eight days to mull the offer over seems a bit rich,” he said. “The offer looks somewhat rushed, unnecessarily and unreasonably so.”

Mozambique’s Minister of Economy and Finance Adriano Maleiane led a delegation to London and New York on Monday and Tuesday to convince bondholders to back the exchange. Holders of the Ematum securities include AllianceBernstein LP, which has almost $30 billion invested in emerging markets, Danske Bank A/S, Franklin Templeton Investments, Goldman Sachs Group Inc., and Aberdeen Asset Management Plc, according to data compiled by Bloomberg.

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.

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