by Priscila Azevedo-Rocha, and David Graves
On an autumnal London October afternoon, the Government of Mozambique’s 2023 bondholders shuddered during a meeting arranged by Lazard and White & Case – Mozambique’s financial and legal advisers – after being told to engage in potential restructuring talks. The bonds collapsed over 20 points after the meeting concluded.
As requested a Global Group of Mozambique Bondholders (GGMB) committee was announced in November, representing more than 60% of the outstanding USD 726.5m 2023s and whose members at the time were AllianceBernstein, Franklin Templeton Investment Management, Greylock Capital Management, NWI Management and Pharo Management.However, two months have since passed, and thus far little has been agreed upon.Bondholders who previously described the proposed timeline for negotiations as “ambitious” stand faithful to their original position. In particular, their need for full disclosure as stated in the above-mentioned announcement that “the GGMB and its members are firmly of the view that under the current circumstances in which there is unreliable information and incomplete disclosure, it is premature to enter into negotiations at this time.”
Thus, negotiations haven’t moved on much and we are now seven days before the USD 59.7m first coupon payment date for the 2023 bonds on 18 January. There is a 15-day grace period for hard default, as specified in the bonds’ prospectus.
While New York, London and Frankfurt trading desks are acutely aware of the potential sovereign default, Mozambique itself awaits a decision from the IMF on a new programme, grappling with Fund conditionality in order to improve its fiscal position, while its population faces the consequences as austerity programmes bite.
Waiting for the IMF to move
The IMF concluded its most recent mission to Mozambique on 12 December, but the possibility of a resumption in financing relies on the Fund’s board of directors’ approval, anticipated by end-1Q17.
A source close to the government told Debtwire that once approved, the programme size is likely to be expanded beyond what it was before – probably in the form of an Extended Fund Facility – but in order to achieve that, Mozambique’s present value of debt as a percent of GDP needs to comply with the Fund standardised provision of lower than 40%, as a percentage of exports to be less than 150% and as a percentage of revenue to be less than 250%.
According to a statement from the Fund following its latest mission, Mozambique’s macroeconomic environment has improved as the metical appreciated 8% vis-à-vis the US dollar since end-September, after a 40% depreciation during the first nine months of 2016.
However, budget financing remains limited as foreign donors are still very wary on providing financing. International reserves have recently started to increase and, according to the Fund, are now expected to cover about 3.5 months of non-mega-project imports at end-2016.
Upcoming LNG projects could be a potential game-changer for the country’s economy, as investments at Rovuma’s basin onshore Area 1 and offshore Area 4 will attract significant flows of international capital, as previously reported.
Area 4 has estimated reserves of 85 trillion cubic feet of gas (tcf), held in its two gas fields – Mamba and Coral. Area 4’s operator is Eni East Africa, which is a joint venture between Eni and the China National Petroleum Corporation (CNPC), where CNPC holds a 28.57% stake, which translates to a 20% stake of Area 4. Other stakeholders include ENH, Galp Energia and Kogas, who each hold stakes of 10%.
Area 1 has estimated reserves of 75 tcf of gas. The consortium holding the licence for the area is made up of Anadarko, with 26.5% of the equity and also operatorship, ENH with 15%, Mitsui & Co with 20%, Thai state oil company PTTEP with 8.5%, and with (ONGH), Oil India Limited and Bharat Petroleum Corp each holding 10%.
However, despite these positive developments in the medium-term, the Fund report states that Mozambique’s short-term outlook remains challenging. “Growth has declined in 2016 and is now projected at 3.4% (down from 6.6%YoY) and inflation, which is expected to peak soon, is still high,” it reads.
The source close to the government added that the timing of IMF board approval will almost definitely take place after the independent audit report from Kroll allowing time for stakeholders to digest the findings. The timeframe of the Kroll audit is 90 days from its start last November, however there is a possibility it could be extended beyond then.
Asked what is next for Mozambique, the source close to the government replied that any concrete restructuring proposal from the sovereign side will only arrive after the IMF has produced yet another Debt Sustainability Analysis for Mozambique. This is in order to establish a justifiable debt target for Mozambique to aim for via restructuring.
There is a possibility that the IMF may, in the course of its analysis, take into account the debt burden of systemic government-related entities such as utilities and the state oil company. These companies have substantial hard-currency debts, and there is a chance that the IMF may take the view that the government should include these companies’ liabilities in the budget, the same source said. Examples of substantial GREs include M-Cel, LAM, Petromoz and EDM.
Nothing has been decided despite the first coupon payment on the 2023s being just days away. The source close to Mozambique’s government said there is a strong chance that commercial creditors will be asked to take a face-value haircut on the notes. In such a circumstance, there is a distinct possibility that they should be offered some sort of upside instrument as compensation, he continued.
A similar situation happened in Ukraine in 2015, when the sovereign agreed upon a USD 40bn bailout package arranged by the IMF and successfully restructured the debt, avoiding default. Commercial creditors contributed with USD 15.2bn of the share.
Ukraine’s other bondholders, led by Franklin Templeton, accepted a 20% principal haircut, a coupon increase to 7.75 percent, a four-year maturity extension and GDP warrants linked to additional annual payments based on Ukraine’s economic growth. The government was also being advised by Lazard and White & Case.
But according to Charles Blitzer, former IMF official and restructuring expert who was hired as advisor to the bondholder committee, many details still need to be cleared before making any decisions on the path negotiations will take.
“We are looking at following long-established best practices on sovereign debt restructuring and at the moment there are a lot of moving parts on this puzzle”, he added, clarifying that the committee is seeking that bilateral government creditors not be considered exempt from restructuring, as are the multilaterals, an official IMF programme be agreed and, in the case of Mozambique, a special circumstance be added – that the international audit is completed and made public for review.
“In the meantime, while we wait for the audit results, we are open to discuss our position, but no discussions have taken place. On our side [bondholders], we have stated our position, but there isn’t enough information coming from the government. We think that there is no need to default on the USD 59.7m coupon payment,” he said, adding that in his experience “a country ultimately is better off if it is perceived as making best efforts to stay current and negotiate when all preconditions are in place”.
However, one bondholder said he was not convinced Mozambique would end up agreeing to a new IMF programme in the end, noting that the country may ultimately not be willing to concede to the level of transparency the Fund requires. However, this would not necessarily be a catastrophe for the country, he said.
Foregoing the IMF’s debt sustainability requirements – and the subsequent loss of concessional funding – would potentially force the country to keep the international capital markets open, continue payments on the 2023s, and be honest with commercial creditors. If the amortisation payments on the MAM and Proindicus loans were rescheduled and the country maintained access to capital markets, the situation could remain manageable until the gas mega-projects come online in around five-year’s time, the bondholder said.
Moreover, the country is in an improved balance of payments position due to currency appreciation recently, he continued. One avenue that might be explored is the issuance of local currency debt to international investors in order to deal with any imminent cash flow issues, he said.
The case of MAM and Proindicus
Since the government released a summary of the key terms of the commercial external indebtedness of the country last November, which officially recognises the so called USD 1.4bn hidden debt attributed to Proindicus and Mozambique Asset Management (MAM), a lot of information remains unknown regarding the documentation of the loan participation notes (LPNs).
In April, the government of Mozambique admitted to the IMF the existence of some USD 1.4bn of previously undisclosed debt. This comprised a USD 622m loan (USD 597.12m outstanding) from Credit Suisse to state-owned defence company Proindicus and a USD 535m (outstanding) loan from VTB to Mozambique Asset Management (MAM), both loans carrying sovereign guarantees, leaving USD 267.88m of the USD 1.4bn unaccounted for.
The MAM loan carries an interest rate of Libor+ 7% payable annually, with USD 133,750,000 amortisation due on 23 May 2016 (unpaid), 2017, 2018 and 2019. The Proindicus loan carried an interest rate of Libor+ 3.20% until 21 March 2014 and then Libor+ 3.75% thereafter payable annually, with a USD 24.88m that was due on March 2016 (which was paid), USD 119.424m on 21 March 2017, 2018, 2019, 2020 and 2021, as reported.
Prior to this, in mid-March, holders of USD 697m of outstanding EMATUM 6.305% 2020 LPNs were offered new Mozambique government-guaranteed bonds due in 2023 in an exchange offer. The new bonds paid a 10.5% annual interest rate with an early exchange ratio of 105% and issued at 80% of the principal amount of the new notes. Prices rose sharply from the low-70s on the old bonds into the mid-80s at the time of the exchange.
But the failure to disclose the hidden debt led to the IMF pausing its financial support midway through a USD 282.9m programme, with the delegation cancelling a planned visit in late April. In total, USD 117.9m was dispersed in December 2015, but the next dispersal was postponed.
According to Blitzer, the government need not put all the country’s external debt in the same basket for restructuring purposes. He points out that the MAM and Proindicus loans and their Government guarantees were not approved by Parliament, and never disclosed to bondholders at the time of the EMATUM exchange.
Therefore whatever the sovereign decides to do regarding the MAM and Proindicus loan participation notes should have no effect on the 2023 bonds. “The 75% threshold for restructuring the bonds applies only to the 2023s, because the terms of bonds do not provide for any sort of aggregation of voting across various debt instruments”, he said.
In any case, a “sovereign debt restructuring never precedes disclosure of the details of an IMF programme and a complete debt-sustainability analysis based on the programme. Creditors, including the bondholders need to assess what adjustments the government is committed to as part of any potential negotiations”, he continued.
The source close to the government, and a second source close to the situation said that VTB and Credit Suisse are engaging with government advisors and have indicated a willingness to restructure the loans, with the two banks representing the interests of loan holders. Millennium BCP, Mozambique branch, has exposure to MAM, according to both sources. It is uncertain the extent to which the Proindicus loan has been sold down, if at all.
Mozambique’s 10.5% 2023 Eurobonds are currently quoted at 54/57, to yield 26.04/24.54, said a portfolio manager. Mozambique is like a “falling knife,” noted another PM who had considered an investment. Despite the price having fallen considerably, from a distressed investor standpoint the 2023s won’t look interesting until they are in the 40s, the second portfolio manager said.
The notes rallied hard from 72 at end-July to hit 82 at end-September, but were quoted at 58.22-mid, yielding 23.56% by end- October, after the government invited creditors to form committee (s) and engage in discussions for potential restructuring.