EMATUM or NEVATUM? Prospects and parameters for bond investors in the coming high debt years

EMATUM_2

 

With this week’s further revelations about the growing extent of Mozambique’s international debt, and the purposes for which those credits were raised, it seems as if EMATUM lenders can always be sure of at least one thing going forward from their investments: more unpleasant surprises. While it is clear that, despite so-called ‘sweeteners’ being added, the value of the original loan was considerably greater than the newly rescheduled balloon repayment on offer, especially when the time value of money and the uncertainty cost of a further seven years wait for repayment are taken into account.

It was also clear quite early on to the EMATUM investors that in choosing to reschedule they had little choice in the matter and so their interests, with or without a so-called ‘haircut,’ were increasingly aligned with the fortunes of the borrower, rather than the kind of claims that they could ever pursue in an international debt court, for example. But before getting too deeply involved in the subject of haircuts, or reductions in return of original capital, that the investors have accepted in having their original investment rescheduled, it is worth realizing that in the world of developing country borrowing, which traditionally has been mostly on a concessionary (i.e. soft loan) basis, the cash flow or debt servicing component is what really matters to governments, with the principal often getting extended and extended again with successive reschedulings, into later and later maturity dates and thereby becoming less significant over time.

Therefore, while private institutional investors may talk about annual percentage returns on capital, coupon rates and yields to maturity, public development bankers by contrast negotiate with governments over Net Present Value or NPV lending, which simply means that by reducing interest due in the short term and pushing away into the future the principal repayments, the burden on the borrower is greatly reduced. This is particularly important for countries like Mozambique who clearly cannot continue to service upwards of $700m in debt at commercial rates according to the original terms of their loans. (far less the $1.4 billion which we have recently come to learn about – the true extent of Mozambique’s fisheries/naval/military expenditure indebtedness under the two 2013 credits –EMATUM and Proindicus -arranged by Credit Suisse and the Russian lender VTB.)

KEEPING THE CLOCK RUNNING

This reduction in NPV – you could call it a ‘’time value haircut’’ is the first aim of over-indebted third world countries like Mozambique, where the real goal is to basically never pay back the principal at all, or else push the effective maturities so far into the long grass that they can be forgotten about by the current generation. This is exactly what Mozambique did in 1998, when some $1.4bn of debt was forgiven (‘’in NPV terms’’) by the World Bank and the IMF and a lot of it was converted into development credits instead of repayable debts by those international institutions. Part of this was later totally forgiven and the rest became a kind of development assistance substitute, with such low interest and long maturities that it represented a minimal burden on the Mozambican treasury.

Although Mozambique has not had to resort to such bail-outs from the international community for over a decade, the financial situation which the country has now got itself into, combined with the country’s continuing acute underdevelopment mean that, sooner or later, this situation is likely to end up back in the hands of the World Bank, IMF or other public international agencies. Having the debt forgiven or converted in the way described above is ultimately the only real route out of the situation in which Mozambique finds itself in right now – and which it may continue to find itself in five or seven years from now, if its gas industry fails to get going in a meaningful way by then.

THROUGH A GAS DARKLY

Turning now to that latter issue of hard currency revenues from natural gas, which after all was the main pretext on which many investors willingly lent to Mozambique some two and a half years ago, things have changed dramatically in the past 30 months. World energy prices have fallen sharply, and negotiations with the lead foreign operating companies in the development of an LNG industry have stumbled and stalled. In news articles about Anadarko and Italian giant ENI’s intentions in the sector, the phrase ‘’FID by the end of this year’’ has almost become Mozambique’s version of the manana song, to the extent that there is now a lot more talk of pull out and sell out (especially to Exxon) than there is of start up any time soon.

Thus, meaningful revenues with which to service over a billion dollars in debt may still be a long way off and may still not be available when the currently rescheduled EMATUM /military loans mature. One thing that would help Mozambique a lot would be a well-timed change of ownership of productive gas concessions at a high price, to yield a hefty capital gain tax windfall just ahead of the balloon repayment, but at present this can still only be wishful thinking.

Even if some funds are forthcoming, the other big problem for the EMATUM 2023 (new maturity) bondholders is that the $700m or so of 2021 maturing debt is two years ahead of them and will thus have first call on available funds – of even greater importance when we are talking about a ‘balloon’ repayment of the entire EMATUM loan, which, in normal prudent treasury management would be provided for steadily over the prior years with a sinking fund to accumulate part of the principal due.

Another complicating factor is that Mozambique has now ‘defaulted’ according to ratings agency Standard and Poors, which means that some or all of the pre-EMATUM lending may have to be prepaid – and which will almost certainly keep the country out of the international capital markets for the best part of the next decade. Comparisons with Argentina which defaulted in 2001 and which slowly and painfully pulled itself back into respectability after a currency devaluation, political turmoil, liberalization of export markets and other tough reforms, are for the most part not valid. The once-thriving South American economy had a core second-world economic infrastructure, high export earning potential from a large, modern agriculture sector and an educated work force, none of which regrettably can yet be said about Mozambique.

The final and possibly most worrying factor for the rescheduled bond holders, is that there remains a very weak culture of debt repayment in Mozambique, both at lower levels of commerce and enterprise as well as on a national scale. It can be fairly said that borrowers often look upon loan agreements more as a guideline as to how much they have taken on (taken out) of the lenders, rather than any kind of binding agreement to actually pay set amounts back according to a set schedule.

This is one major reason why banks are most unwilling to make commercial loans to new borrowers even today, unless some other guarantee or incentive is provided. It is also an explanation of why the EMATUM loan documentation ran to some six or seven pages rather than the 60 or 70 pages typical in a Eurobond or other mainstream international borrowing facility. The still-recent financial history of Mozambique is sullied with tales of large scale looting of banks where ‘loans’ were made on favourable terms to favoured ‘borrowers’ who neither serviced the debt nor repaid principal.

A further issue of concern is that when governments change, (as they will have by 2023) it has not been unheard of for new incoming administrations to simply say that they will fail to honour contracts (or debts) which were taken on illegally by their predecessors – this could be said of EMATUM, which was never approved by the Mozambican National Assembly – and thereby just try to dump the debt back on the lenders. When you are already in a state of default with no exit in sight, there is a greater incentive to do this than if you have a chance of returning to respectability, as did Argentina.

Interestingly, the new Frelimo Administration which took office in 2015 in Mozambique could not do that in the case of EMATUM, partly because the loan was still new and the worst of the problems had not yet come fully to light, but also because the new president of the Republic, Filipe Nyusi, was Minister of Defence at the time the EMATUM scheme was being hatched by former President Guebuza and Finance Minister Manuel Chang, and thus must have been as aware as any of the scheme which was just unfolding at the time he began to manoeuvre for the Frelimo presidential candidacy himself.

In closing, while there is still hope that the saga of Mozambican international borrowing in the first quarter of the 21st century will end with a triumphant lion’s roar rather than the sucking sound of being pulled under by a Rio Zambezi crocodile, as things look right now, investors can expect a long hunt ahead get back their EMATUM money, and they should be prepared to spend quite a bit of that hunt looking deep into the long grass.

By Colin Waugh

*Colin Waugh is a financial economist and investor based in Maputo

 

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