Hedge funds line up against Mozambique in tuna bond battle

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Hedge funds and some of the world’s biggest emerging-market bond investors are girding for a fight with Mozambique and its other creditors.

The country’s attempt to reach a restructuring agreement by the end of the year suffered a blow when a group of five investors, who hold 60% of its US$727million of Eurobonds, said the notes should be treated differently from loans to two state companies and talks couldn’t begin until an IMF programme was in

place. Mozambique wanted to negotiate with creditors as one group, while the Washington-based lender has said a deal with the bond and loan holders should come first.

The move by the investors, who include Franklin Templeton and New York-based hedge fund Greylock Capital Management LLC came two weeks after the government said it needed to restructure around US$2-billion of foreign debt, including the Eurobonds, sold barely six months ago in a swap for more expensive debt owed by a state tuna-fishing business, known as Ematum.

Yields on the sovereign securities, due in January 2023, soared by more than 900 basis points to almost 25% and overtook Venezuela’s to become the highest in the world.

“It’s not the fault of bondholders and they shouldn’t expect any willingness by us to accept” writedowns, Lutz Roehmeyer, who helps oversee about US$12-billion in assets at Landesbank Berlin Investment, including Mozambique’s Eurobonds, said by phone. “They should go into default on those loans to the state companies. There’s no need to pay the loans on time”.

What happened?

Mozambique, one of the world’s poorest nations, went from being lauded two years ago by the IMF’s Managing Director Christine Lagarde to being ravaged by a combination of excessive borrowing, plummeting commodity prices and delayed investments in massive natural gas fields. The crisis worsened in April when the IMF and other donors cut aid after they discovered around US$1.4billion of secret loans issued several years ago by the state firms, Proindicus and MAM.

Is Mozambique really in bad shape?

Finance Minister Adriano Maleiane was “visibly stressed” when he made his presentation to investors on 25 October, according to Anne Fruhauf, an analyst at New York-based Teneo Intelligence. Public debt has rocketed from 40% of GDP in 2012 (the year before Mozambique took on the loans), to 113% – higher than anywhere in sub-Saharan Africa apart from Eritrea and Cabo Verde, according to the IMF. Mozambique forecasts its net foreign reserves will be US$1.1-billion next year, down almost 60% from 2014.

The government said it would have no money left over for debt payments in 2017, when it has to remit a US$60million coupon in the Eurobonds. In Maputo many stores are empty and Mozambicans are battling inflation of 26%. Since the start of 2015, the metical has lost 57% of its value against the

dollar, making external debts more expensive to service.

“Mozambique is in a really, really difficult place”, Alex Vines, head of the Africa Programme at London-based Chatham House, said in an interview in Johannesburg (South Africa) on 4 November. “They’re on this cliff-edge. They don’t have money”.

Who’s involved?

The creditor group comprises Franklin Templeton and AllianceBernstein LP, which between them manage US$1.2trillion of assets, and three hedge funds: Greylock and NWI Management LP, both New York-based, and London’s Pharo Management LLC. They called on other bondholders to join their group, but said it will be closed to the loan investors. Charles Blitzer, who spent nearly nine years at the IMF, most recently as assistant director in the capital markets department, is advising the bondholders.

“The bottom line is bondholders are exasperated”, said Blitzer.  The loans to Proindicus and MAM, due in 2020 and 2021 respectively, were originally provided by Credit Suisse Group AG and Russia’s VTB Group, though the banks syndicated some of the debt. Mozambique is being advised by Lazard Freres, an investment bank, and law firm White & Case.

A standoff with investors could worsen the southern African nation’s sharply declining economic growth and double-digit inflation.

“We are trying to convey a sense of urgency because we think it’s in everyone’s interest to find a quick solution”, says Ian Clark, a lawyer at White & Case LLP who represents Mozambique in the restructuring talks. “The payment capacity is virtually nil”.

The bonds and loans were arranged by Credit Suisse Group AG and Russian lender VTB Group. Credit Suisse declined to comment on the loans. A spokesperson for VTB said that: “Mozambique confirmed to us that they were following the necessary internal and external legislation

and that comprehensive information on the loans was disclosed to creditors and investors”.

Bondholders want Mozambique to restructure its bank loans and bilateral loans owed to foreign governments before restructuring the bonds again, people familiar with the matter said. The US$76million annual interest expense on the bonds accounts for a relatively small 9% of Mozambique’s total debt service costs over the next five years, they said.

Mozambique’s repeat restructuring highlights the risk banks and investors took when ploughing money into frontier markets during the commodities boom through 2014.

Lee C. Buchheit, a top sovereign-debt lawyer with Cleary Gottlieb Steen & Hamilton LLP, recommended Mozambique repudiate the loans in informal communications with government officials in May, according to emails reviewed by the Wall Street Journal. Buchheit argued that the government guarantees backing the loans were illegal and that restructuring the debts would legitimise them.

Clark, the legal adviser that Mozambique ultimately hired, said the government guarantees in the loans are enforceable under UK law.

What is Mozambique trying to do?

Minister Maleiane and President Filipe Nyusi want to delay debt payments until the country starts profiting from offshore gas fields that were discovered by Anadarko and ENI SpA at the start of the decade. Until then, money will be tight. In its presentation, Mozambique said exports are “expected to significantly increase in the early 2020s”, with government revenue rising to US$12.3-billion in 2025 from US$2.5-billion today.

“They need to buy themselves time”, Phillip Blackwood, a managing partner at EM Quest Ltd., which advises Denmark’s Sydbank A/S on about US$2.5-billion of emerging-market assets including Mozambique’s bonds, said by phone from London.

What happens next?

Mozambique hoped to talk to investors this month before concluding a framework for a “debt resolution proposal” in December, according to the presentation. That was meant to help it negotiate new funding from the IMF early next year. The formation of the creditor group and its demands mean that timetable probably won’t be kept.

“There’s not a basis for trust”, said Roehmeyer. “I think it’ll take roughly half to three quarters of a year to sort out”.

The bond group has also said that it won’t start talks until an audit of Proindicus,

MAM and Ematum is completed. The government has chosen New York-based risk analysis firm Kroll to carry that out.

What are Mozambique’s options?

On 3 November, a spokesman for the Finance Ministry said in an interview that the government wants to extend its maturities to 2023 and 2024, rather than impose outright losses on creditors. A day later, the Ministry backtracked, saying in a statement it was looking at all options.

The bondholders, who say they already made a concession earlier this year when they agreed to swap out of the Ematum notes into the longer-dated Eurobond, seem in no mood to back down. Some are also calling on Mozambique to cut its spending.

“The holders of the Eurobond are on firmer footing because they’ve already taken a restructuring, whereas the loan holders haven’t”, Blackwood said. “The loan holders really need to restructure and push out their payments, as the bondholders already have. Mozambique also has to make some budget cuts. It can’t just say that there’s no money left”.

Source: Bloomberg/The Wall Street Journal

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