Mozambique Won’t Blink First as Battle With Bondholders Heats Up

  • Interest payment on $727 million Eurobonds due Jan. 18
  • Government signals it’s unable to make payments in 2017

Don’t expect Mozambican officials to back down in a stand-off with investors, even though it may be the first African nation to default on dollar bonds since 2011.

As recently as last week, bondholders were convinced the nation would pay the almost $60 million bond coupon on schedule Jan. 18. Not only did the government on Monday say that’s not happening, it also signaled it won’t make payments in 2017. Since Mozambique issued the notes last year, bondholders have discovered the southern African country has debts it failed to disclose, a revelation that prompted the International Monetary Fund to withdraw its support in April.

JPMorgan Sees Mozambique Defaulting on Eurobond Next Week

“It might put the restructuring discussions in a more fractious position between the two sides with the government having done this and bondholders feeling aggrieved,” said Stuart Culverhouse, the London-based chief economist at Exotix Partners LLP who downgraded his outlook on Mozambique’s bonds less than two weeks before they plunged in October. Neither side is on a “good footing,” he said.

Discussions may result in a writedown of as much as 40 percent, Culverhouse said. The creditors include Franklin Templeton Investment Management Ltd. (U.K.) and AllianceBernstein LP.

Mozambique is being advised by Lazard Ltd. and White & Case LLP, which acted for Ukraine during its $15 billion debt restructuring in 2015. The eastern European country ultimately backed down on its threat to default.

Even after missing payments, most sovereigns typically sell new bonds quickly, but “it doesn’t seem likely that Mozambique will easily get back to the market for some years to come,” said Marco Ruijer, who oversees about $7 billion of emerging-market debt at NN Investment Partners in the Hague and sold his Mozambique holdings in October. “That could indicate a harsher deal.”

Playing Hardball

Saying it will miss the interest payment could be part of the government’s “tough negotiating strategy” to compel bondholders to accept more lenient repayment terms, BMI Research said in an e-mailed note. It won’t bode well for future negotiations, it said. The African nation has a 15-day grace period to pay the coupon, according to the bond prospectus.

Investors, who formed a creditor committee last year, have refused to start restructuring talks until the authorities publish an audited report detailing the previously undisclosed debt and reach a deal with the IMF. Charles Blitzer, a Washington-based former IMF official who’s advising the group, declined to comment on the government’s announcement on Monday.

Tiny Economy

Mozambique’s economy has contracted for two straight years to $12 billion at the end of 2016, according to IMF estimates. It has never exceeded $16.9 billion, which is still less than the amount Saudi Arabia raised in its debut dollar-bond sale last year.

The capacity of the former Portuguese colony to make debt payments is “extremely limited,” the Ministry of Economy and Finance said in an e-mailed statement on Monday. The authorities, who said in October they need to restructure the government’s commercial debt, are in talks with the IMF about resuming support to the nation.

The $727 million bonds due January 2023 rose 26 cents to 55.26 cents on the dollar by 11:21 a.m. in London, having a reached a record low of 50 cents last week. EMTA, an emerging markets trade group, recommended that the notes should trade flat following the government’s announcement.

The IMF should “coax the issuer to be more constructive on the contents of talks and accelerate the talks as well,” said Koon Chow, a strategist at Union Bancaire Privee UBP SA in London.

— With assistance by Natasha Doff

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