Mozambique paid US$35-million to Russia’s VTB Bank for shipyard loan

Russia’s VTB Bank

Mozambique, one of the world’s poorest countries, paid US$35-million in up-front “arrangement fees” for a US$500-million loan organised by Russia’s VTB Bank, according to loan related documents reviewed by Reuters. In percentage terms – 7% – the fees are several times what some bankers say is typically paid on such deals.

The loan was made in 2014 to state-owned Mozambique Asset Management (MAM), which was established to oversee the construction of shipyards in Maputo and in Pemba (Cabo Delgado Province). MAM missed a US$178-million repayment due on 23 May, putting the government on track for default if it fails to honour a state-guarantee or renegotiate the debt with creditors. The MAM debt is part of US$2-billion that Mozambique has borrowed through bonds and loans since 2013 in deals that were not reported to parliament. Mozambique law requires parliament to authorise such borrowing.

The full extent of Mozambique’s borrowing emerged in April when the government informed the International Monetary Fund (IMF) about the previously undisclosed loans. As a consequence of the disclosure, the IMF suspended aid to Mozambique. During the course of the week 3 to 10 June, parliament authorised a Commission of Inquiry into the borrowing after a two-day emergency debate on the issue. So far, there has been no official apportionment of blame.

In a BBC radio interview last month, IMF Managing Director, Christine Lagarde, said that the lack of transparency by the Mozambique government in its borrowing was “clearly concealing corruption”. She did not elaborate. The arrangement fees charged to MAM under the terms of the VTB loan amount to 7% of the sum borrowed, according to the loan document and a 13 November 2015 letter from VTB’s investment arm, VTB Capital, to the Maputo office of audit firm Ernst and Young. It was unclear what, if any, role EY played.
Three Johannesburg-based bankers with experience in arranging African sovereign debt deals told Reuters that the charges were excessive, with 1% being the industry norm.

“If it’s a really complicated credit, you might push it up to 2%”, said one of the bankers, who did not wish to be named because of the commercial sensitivity of investment banking fees. In response to questions from Reuters, VTB said the terms of the six-year loan had stipulated annual interest of 8.87% over the floating London Interbank Offered Rate (LIBOR). This was in line with other bilateral financing deals in sub-Saharan Africa and an US$850-million, 10-year Eurobond issued by Mozambique state tuna firm Ematum in 2013, VTB said. However, on 8 June, Finance Minister Adriano Maleiane told parliament that the interest rate on the loan is 12 month LIBOR plus 7.739%.

VTB said the arrangement fees, charged to MAM and set out in the loan document and VTB’s letter to EY, included interest charges that Mozambique agreed to pay up front. The Johannesburg-based bankers said that immediately paying back interest on a loan out of the proceeds of the loan itself was an unconventional financing structure. They said that typically interest and capital are paid back at intervals over the duration of a loan, but not at the outset. The letter from VTB Capital to confirmed disbursement to MAM of US$435-million on 23 May 2014 with an “Arrangement Fee” of US$28,457,943.93. A follow-up payment on 11 June of US$100-million had an accompanying charge of US$6,542,056.07, it said.

Mozambique Finance Ministry spokesperson, Rogerio Nkomo, said that he was unaware of the details of the fees. Attempts to contact MAM were unsuccessful. Requests by Reuters for comment emailed to the Maputo office of EY were not answered and telephone calls were not returned. Neither the loan contract nor the EY letter detailed whether all of the fees went to VTB or whether they were split with other intermediaries.

Donor anger:

Only in April did the government acknowledge the existence of two loans – the one arranged by VTB and a US$622-million loan taken out by Mozambique state-owned security firm Proindicus. Together, these loans have pushed the former Portuguese colony’s total foreign debt to 80% of gross domestic product (GDP). Public anger at the government’s racking up of US dollar debt equal to US$400 per capita – a sum only slightly less than the average Mozambican’s annual income – is rising. The IMF and donors, who normally account for 40% of Mozambique’s budget, have suspended aid to Maputo, annoyed at being kept in the dark over the US$2-billion in borrowing.

Mozambique’s sovereign credit ratings are now deep in “junk” territory. Fitch has downgraded Mozambique’s credit rating to CC from CCC, indicating that: “a default of some kind appears probable”. The government and creditors have been in talks to try to reach a repayment solution. Mozambique sent a delegation to Moscow to meet senior VTB management at the end of May, one VTB official said. Neither side has given details of the outcome.

Source: Reuters/Mozambique News Reports
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