As expected, the government did not make its 18 January payment of US$59.8million on the US$727-million rescheduled Ematum bond. All payments on the US$2million secret debt have now been stopped.
During the course of last week, Bloomberg said that: “Don’t expect Mozambican officials to back down in a stand-off with investors, even though it may be the first African nation to default on dollar bonds since 2011. As recently as last week, bondholders were convinced the nation would pay the almost US$60-million bond coupon on schedule. Not only did the government on Monday say that’s not happening, it also signalled it won’t make payments in 2017”.
Bloomberg sees the default as part of government’s strategy to compel bondholders to negotiate a restructuring, which they’ve so far resisted. The IMF resident representative in Maputo, Ari Aisen, said that, in effect, the government had told creditors at a meeting in London in October that it would stop paying.
No deals are likely before mid-2017 at the earliest. Both donors and private creditors want negotiations to be concluded with the IMF first, and all three are waiting for the completion of the Kroll audit. That is due in February, but it is widely expected that Kroll will ask for a second three months. Kroll has been hired to audit the three security service controlled companies, Ematum, Proindicus and MAM, that took the US$2-billion loans. But much of the loan money was paid, highly unusually, not to the Mozambican companies that borrowed it, but to the Lebanese company that organised the deal, Privinvest. That company is highly unlikely to provide any information to Kroll, so it will be necessary to use information from the three Mozambicans companies as to how the money was used – and it is unclear how co-operative the companies and their masters (the security services, SISE) are being.
The matter is further complicated because the IMF can only formally negotiate when it confirms that Mozambique is at least on a path to sustainable debt, which in turn requires the private creditors to first renegotiate the US$2-billion secret loans. But the private creditors won’t negotiate until there is an IMF deal. Mozambique is trying to break the logjam by forcing the private creditors to negotiate first.
The next payment is due on 21 March and is US$119-million on the Proindicus loan. Unlike the Ematum loan, this is owed by the company rather than the government, and this is an important distinction.
Two different kinds of loans require different responses:
The US$2-billion in secret debt was composed of three different loan packages to three different private companies, all owned by the State and controlled by SISE. Manual Chang, then finance minister, signed agreements granting government guarantees for the loans, but the parliamentary investigation last year said such guarantees were unconstitutional and illegal, as only parliament can guarantee loans.
But the three loan packages are very different. The loan to Ematum (the tuna fishing company) was a Eurobond issue. In effect, the government accepted the guarantee, and issued US$726-million in government bonds to replace the original private bonds. These are known as bullet bonds, because the capital is all repaid at the end – 18 January 2023. The interest rate is a very high 10.5%, paid twice a year, and it was the interest which was not paid on 18 January. These bonds can now be purchased at half their face value.
The other two loan packages – US$622million by Credit Suisse to Proindicus and US$535-million by VTB to MAM – are syndicated loans, which means the banks sell on pieces of the loans to private investors. These are still loans to private Mozambican companies – very different from the government bonds issues for Ematum. Proindicus made its first payment, of US$25-million in March 2016, and is due to pay US$119-mllion in March 2017. MAM failed to pay US$134-million
in May 2016. But the key point is that lenders are still treating this as a private loan – they have not called on the government-guarantee.
US SEC investigating banks:
The US Securities and Exchange Commission (SEC) is investigating the banks involved in the sale of the Ematum bonds, the Wall Street Journal reported. Reuters reports that the investigation began in July, and in November the SEC asked bondholders for documents provided by Credit Suisse, VTB and BNP Paribas during the sale of the bonds. Financial watchdogs from Switzerland and Britain are also looking into Credit Suisse’s and VTB’s involvement. The SEC is involved because a number of US firms acquired the bonds.
In London financial circles, questions are being asked about the role and possible liability of Credit Suisse – which arranged two of the loans. Credit Suisse would be expected to do what is called a “due diligence” study on Mozambique and the loan, to assure itself and those who are taking on the loan that is it likely to be repaid.
Any due diligence would have shown that Manuel Chang could not guarantee the loan, that the feasibility studies for the project were widely unrealistic, that the loans involved substantial arms spending not publicly revealed, and that corruption seemed likely.
Furthermore, because of the highly unusual circumstances of disbursing money directly to Privinvest in Abu Dhabi, a due diligence should have been done on that company and its role. Rumours in London are that Credit Suisse was given informal advice against making the loan.
This was all made more questionable when it was revealed that a senior banker for Credit Suisse who was involved in putting together the deals left the Swiss bank shortly afterwards to join Privinvest.
If the government of Mozambique were to simply renounce the guarantee as illegal and unconstitutional, it would do two things. First, it would take US$1.2-billion out of official debt guarantee statistics, bringing the debt closer to sustainability and making negotiations with the IMF possible. Second, it could force Credit Suisse and VTB to go to court in London to enforce the guarantees – thus exposing their own poor conduct. Therefore, Credit Suisse and VTB might be forced to accept some of the liability.
Mozambican banks are said to hold some of the Ematum bonds and are part of the syndicates which have taken Proindicus and MAM debt. This raises the interesting possibility that banks in Mozambique, or their international parents, might sue Credit Suisse and VTB for misleading them as to the quality of the loans.
Safa hits choppy seas:
Meanwhile Intelligence Online recently reported increasing problems for FrancoLebanese businessman Iskandar Safa, owner and founder of Privinvest. Intelligence Online says that as well as the Kroll investigation in Mozambique, there is an investigation of an Angola contract to buy ships from the
French subsidiary of Privinvest, Constructions Mecaniques de Normandie (CMN), in Cherbourg, which also built the tuna fishing boats for Mozambique. Intelligence Online says CMN is in the constituency of Prime Minister Bernard Cazeneuve, who it calls “a long-time
friend of Safa”. Intelligence Online adds that: “the probes have put a spanner in the works of Privinvest’s prospection for other contracts because banks, concerned about compliance, are increasingly loathe to provide financial guarantees for the company”.
Safa also has legal problems with his Greek shipyard, and his German shipyard is making submarines for Israel which is causing problems for him in Lebanon.
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