Mozambique Bonds Extend Slump as Investors Brace for More Pain

  • African nation seeks new debt terms to qualify for IMF aid
  • Investors may need to take write-downs to avoid future trouble

Mozambique’s Eurobonds slumped to a record for a second day after the government hired advisers to negotiate a restructuring that at least one adviser said could involve write downs for investors. Further pain may lie ahead for bondholders, according to NN Investment Partners, which has ditched the bonds.

The $727 million security has fallen 22 cents on the dollar to 59 cents since the African nation revealed on Tuesday it hired Lazard Ltd. and White & Case LLP to oversee meetings with creditors to change terms on its debt to qualify for a resumption of International Monetary Fund aid. Mozambique’s external burden amounts to $10.1 billion, including $1.73 billion of liabilities to commercial creditors, according to a presentation posted on the Finance Ministry’s website.

“The bonds could fall all the way to 30 cents on the dollar,” said Marco Ruijer, who oversees about $8 billion of emerging-market debt at NN in the Hague. His company reduced its holdings of the bonds earlier this month, and sold the rest during the finance ministry’s Tuesday presentation to bondholders. “I’m shocked that they are restructuring already.”

The African nation, which is struggling to service dollar-denominated debt after its currency suffered the second-biggest depreciation worldwide this year, said it’s in breach of five debt-burden indicators monitored by the International Monetary Fund. The revamp means investors who in March agreed to exchange $697 million of bonds issued by a state-owned tuna-fishing company for the longer-dated sovereign debt may need to accept a writedown or new maturities.

“The debt has gone ballistic in the past year,” said Phillip Blackwood, a managing partner at EM Quest Ltd., which advises Denmark’s Sydbank A/S on about $2.5 billion of emerging-market debt, including Mozambique’s bonds. “The unaffordability of the debt has been apparent.” The government may seek to postpone interest payments until it starts receiving revenue from gas projects after 2021, he said. “There could also be a haircut. I would estimate that it would be a combination of the two.”

Prime Minister Carlos do Rosario told lawmakers Wednesday the country was also negotiating with creditors to restructure debt of state-owned Mozambique Asset Management and Proindicus, a security company set up to protect the nation’s water resources. The government will hire an independent international auditor to probe the nation’s external burden, he said.

Sliding Currency

The government wants to complete a financing agreement with the IMF by early 2017, which means it needs to reach an accord in principal with creditors "on a debt-resolution proposal" by December, it said. The IMF is ready to assist Mozambique in its discussions with creditors, country representative for the Washington-based fund Ari Aisen said Wednesday.

Mozambique was counting on one of the biggest gas discoveries in decades to power an economic boom, but the combination of excess borrowing at a time of depressed commodity prices and plunging foreign investment have arrested growth in the southern African country. The economy will expand by 3.7 percent this year, half the pace of 2014, according to the IMF. Its currency has weakened 38 percent this year, the most globally after Suriname’s dollar.

‘Further Risks’

Of the total debt burden, 80 percent is owed to multilateral and bilateral creditors. The restructuring in March involved repackaging more than $800 million in loans received for a fleet of tuna-fishing vessels as $727 million of Eurobonds.

The IMF suspended aid to Mozambique in April after discovering $1.4 billion of previously undisclosed external loans, saying it would resume financial assistance after an independent, international audit. Bilateral donors also halted aid.

For EM Quest’s Blackwood, investors might accept write-downs to avoid further problems in the coming years.

“If there’s no haircut, there’s a risk they will need another restructuring further down the line,” he said. “There’s a lot of uncertainty still at this stage.”

— With assistance by Paul Burkhardt

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