Breaking news! Mozambique confirms that it cannot pay bondholders

debt_bondholder

The Mozambican Ministry of Economy and Finance on Monday confirmed that Mozambique will not pay the interest on bonds initially issued by the Mozambican Tuna Company (Ematum) and which is due on Wednesday.

A statement from the Ministry, in both English and Portuguese, addressed to the bondholders, points out the Minister of Economy and Finance, Adriano Maleiane, made the country’s financial situation clear in a presentation given to creditors in London on 25 October, and reiterated in a ministry statement of 14 November.

“The deteriorating macroeconomic and fiscal situation of the Republic has severely affected the country’s public finances”, says the Monday statement. “The resulting debt payment capacity of the Republic is therefore extremely limited in 2017, and does not allow the Republic room to make the scheduled interest payment”.

The Ematum bonds were for 850 million US dollars. They were issued in 2013, via European banks, notably Credit Suisse and VTB of Russia. To this day, there has been no full public disclosure as to what the money was used for. Certainly the 24 fishing vessels and six patrol boats ordered by Ematum from a shipyard in the French port of Cherbourg were not worth anywhere near 850 million dollars. The French press in 2013 costed the deal at 200 million euros (230 million dollars at the exchange rate of the time).

The repayment terms were extremely tough – the money was to be repaid over seven years, with a two year grace period, and at an interest rate of LIBOR (London InterBank Offered Rate) plus 6.5 per cent.

The Ematum bonds were converted into sovereign government bonds with a longer repayment time, but at a higher interest rate under a deal reached with bondholders in April 2016. What remained of the Ematum bonds were swapped for government bonds for 585.5 million dollars maturing in 2023. The interest rate, however, shot up to 10.5 per cent.

The new arrangement was a bullet bond – that is, the government would not have to repay the capital until 2023. Until then it would only be obliged to make annual interest payments. The government’s assumption was that by 2023 revenue will be flowing in from the vast natural gas fields in the Rovuma Basin, off the coast of the northern province of Cabo Delgado.

But the public debt situation proved much worse than initially believed since the previous government, led by President Armando Guebuza, had hidden from the Mozambican public and from international partners, including the International Monetary Fund (IMF), government guaranteed loans of over 1.1 billion dollars, again from Credit Suisse and VTB, to two security-related companies, Proindicus and MAM (Mozambique Asset Management). The Proindicus, MAM and Ematum loans added 20 per cent to Mozambique’s foreign debt.

The government statements of October and November had made it clear that the loans and bonds cannot be repaid under existing conditions, but must be restructured.

Debt restructuring is key to bringing the debt back to sustainable levels – and without debt sustainability the IMF will not resume any programme with Mozambique. The IMF suspended its programme with Mozambique last April because of the undisclosed loan guarantees, and will only resume cooperation after an independent audit of Ematum, Proindicus and MAM, and a restructuring of the debt.

The Monday statement told the bondholders that “the Government is actively working with the IMF to establish the conditions necessary for an early resumption of its financial assistance to Mozambique. Financial support from the IMF, underpinning an ambitious program of reforms to be agreed, will play a critical role in improving the Republic’s public finances and stabilizing its macroeconomic situation”.

That, however, cannot happen, the statement points out unless measures are agreed with creditors “to put the country’s debt on a sustainable path”.

The Ministry insists that it is “committed to engaging in a collaborative process with the Republic’s external commercial creditors, consistent with international best practices, with the objective of finding a solution within the parameters of the IMF’s debt sustainability framework for low-income countries”.

It adds that it regards the creditors “as important long-term partners whose support of the necessary debt resolution process will be critical for the future success of the country”.

Once again, the Ministry suggested that the bondholders should liaise with the government’s legal and financial advisors, respectively the London law firm, White & Case LLP and Lazard Frères, which claims to be the world’s leading financial advisory and asset management firm.

The purpose of such liaison would be to establish “a collaborative and constructive dialogue consistent with the principles” mentioned earlier in the Ministry’s statement.

Source: AIM

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