Mozambique's unfolding drama keeps investors on the sidelines, IMF visits Maputo
Mozambique continues at the heart of a dramatic debt scandal which has left investors in wait-and-see mode, according to five market participants polled by Debtwire. The government's USD 727m 10.5% 2023 bonds have scarcely traded since January despite many enquiries, said a trader.
Still, the bond price has gradually been marked down from 92 to the mid-80s as investors grapple with legal uncertainty surrounding the award of loans to Mozambican state-owned companies Proindicus, Mozambique Asset Management and Ematum. The 2023 sovereign bonds are the result of an exchange out of Ematum loan participation notes (LPNs) approved by the Mozambican Parliament in 2016.
Mozambique's government is heavily involved in legal action in various jurisdictions. A US Department of Justice indictment unsealed in January has named top Mozambique officials, including the former finance minister, as defendants in a USD 2bn alleged fraud scheme involving the loans.
Meanwhile, the country filed a claim at the London High Court against Credit Suisse and Privinvest earlier this month. Mozambique’s Attorney General has said the government will seek to annul the sovereign guarantees on the USD 622m Proindicus loan, arranged by the Swiss bank. Mozambique is also reportedly seeking to get Credit Suisse to pay back the USD 535m MAM loan, even though Russian lender VTB Capital was the lead arranger.
In contrast to the attempts to disavow the loan guarantees, Mozambique’s prime minister said this week the government intends to continue with creditor negotiations, taken to mean the in-principle agreement reached with 60% of 2023 bondholders in November. Despite this, two buysiders and a second trader believed the bonds were overpriced at their current mid-80 levels.
“I can get plenty more interesting things in the 80s, Mozambique bonds are simply too expensive given all the moving parts on the legal side, and the lack of news on the restructuring talks since November,” said the first buysider. For comparison, Zambia’s stressed but performing USD 1bn 8.5% 2024 bond trades at 78 cents, according to IHS Markit data.
“I see very little value in the bonds, they're in default and trading in the 80s, and the country’s fundamentals are not strong enough,” the second buysider said. “I’m also concerned that some compliance departments will start applying a blanket policy against any Mozambique investment. We don't know how the situation will play out, so we don't want to get involved.”
The relative high price of the bonds raised even more questions when compared to Proindicus quotes, the two buysiders and the second trader said. Although very few Proindicus trades have been registered since January, those that were, closed in on the 40c mark, the second trader said. A third buysider said some trades had gone as low as 30c. None of those polled could provide any quotes for MAM.
“I don’t understand the price discrepancy between the bonds and Proindicus,” said the second trader. “It doesn’t look like the bond restructuring is particularly live, so it’s not clear whether those terms still stand. And sure, there is a coupon difference – Proindicus pays Libor+ 3.20% compared to the 10.5% coupon on the bonds, which has resulted in quite a difference in accrued interest after three years, but with Libor rising the coupon gap is narrowing.”
The third buysider was the only one to defend the price differential, arguing that the bond and the loans were on a very different legal footing.
“The bonds are sovereign debt and have a restructuring agreement in principle, which was reaffirmed this week by the prime minister,” the third buysider said. “The loans are sovereign-guaranteed, and the validity of these guarantees is being contested in London.”
Restructuring talks drag on
Bond restructuring talks have lost traction and a deal is unlikely to close by 1Q19 as originally anticipated, a source close to the talks said. While bondholders had the numbers to pass the preliminary agreement back in February, the government has yet to officially communicate with them since the US Department of Justice made its first charges in January, a second source close said.
The London filing adds another layer of legal uncertainty, and with elections looming in October, the ruling Frelimo party (Mozambique Liberation Front) is under intense scrutiny locally over its involvement in the debt scandal.
“Bondholders are still confident that they will get the terms of the in-principle arrangement through without an issue, but that remains to be seen,” said an advisor familiar with the situation. “There hasn't been much movement.”
“I don’t think anybody expects the deal not to happen, but at this point it’s unlikely to happen in March, and I would even say before elections,” said the third buysider. “It’s possible that some of the terms of the agreement could be amended, but I think the net present value will be untouched from the proposal made in November.”
The November deal proposed an exchange of the 2023s into a USD 900m 2033 bond (with a coupon stepping up in 2023 from 4% + 1.875% PIK to 5.875% cash-pay) in addition to a value recovery instrument (VRI). The VRI will be linked to Mozambique’s future gas revenues from LNG export sales from Areas 1 and 4, both of which expect final investment decisions on multi-billion onshore developments this year.
The final deal will require a 75% bondholder approval and ratification by Mozambique’s parliament, as reported.
IMF visits Maputo
Amid all the uncertainty, an IMF (International Monetary Fund) staff mission to Maputo began earlier this week. An academic research note by Joseph Hanlon of the Open University has suggested that the Mozambique’s challenge to the Proindicus sovereign guarantee in London could be a bid to convince the fund to treat the Proindicus and MAM debt as contested. This could make it excludable from total debt estimates in any future debt sustainability analysis (DSA).
The same research note suggested that the resulting reduction in Mozambique’s debt stack could revive the prospect of IMF assistance, beginning with a staff monitored programme (SMP) and eventually leading to a funded programme.
“This is a very valid analysis, there is precedent of the IMF excluding contested debt from total debt figures by arguing that it is a contingent liability,” said the third buysider. “The issue here is that the MAM and Proindicus loans are not that large in the grand total of Mozambique’s debt, so it may not make that much of a difference.”
As of 3Q18, the Proindicus (USD 597m) and MAM (USD 535m) loans represented just 8.42% of Mozambique’s total USD 13.43bn public sector debt (including both sovereign and sovereign-guaranteed) according to a pamphlet published on Mozambique’s Ministry of Finance website earlier this month.
A sub-Saharan Africa economist was less optimistic about Maputo’s chances of courting the IMF, arguing that it was likely there were too few details on the London legal action for the IMF to make a judgement call.
“I understand the logic behind the London filing potentially making the loan debt a contingent liability, but I’m not sure whether the IMF can make a decision before there is a bit more legal clarity,” said the economist. “On a more general note, I can't see the IMF agreeing to anything before the elections for fear of being seen as interference.
But the third buysider dismissed elections being a decisive factor in IMF reasoning, pointing to the example of Ukraine’s recently closed stand-by arrangement (SBA) with the fund last December, ahead of presidential elections later this month.
“I understand from conversations with people on the ground in Maputo that the IMF are very warm to the idea of rekindling relations,” the third buysider concluded. “They won’t even require a resolution of the bond restructuring. The precedent in the Republic of Congo’s restructuring is that the Fund is happy to proceed with programme talks even if commercial creditor talks are unresolved, as long as they are ongoing.”
The IMF has allowed funded programme talks to progress in the Republic of Congo despite there being no resolution in sight for commercial creditors in the country’s USD 9bn debt restructuring.
The IMF is expected to release an end-of-mission statement on Mozambique before the end of March.
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