by David Graves and Priscila Azevedo-Rocha
Hopes are dimming of a swift resolution to the Mozambique debt crisis, as advisers to the government maintain that sovereign guarantees of the controversial ‘secret’ loans to state enterprises should not be disavowed. Mozambique bondholders argue that the findings of a recently published audit into the debt justify the scrapping of the guarantees.
The audit, conducted by Kroll, investigated how some USD 2bn borrowed by three state-owned Mozambican companies – ProIndicus, MAM and EMATUM – and guaranteed by the government, was spent. The audit could not account for a missing USD 500m and suggested the companies overpaid for assets by more than USD 700m. The report was released last Saturday (24 June).
The discovery of the secret loans last year threw the country into economic turmoil, as the IMF withdrew from Mozambique and holders of the sovereign 10.5% 2023 bonds – the result of an earlier debt exchange out of the EMATUM loan participation notes – were told late last year to start organising for a restructuring.
A statement released by the Global Group of Mozambique Bondholders (GGMB) yesterday (29 June) argued that the audit results, coupled with the findings of an earlier parliamentary commission, made it “evident that there is no basis – in either Mozambican or English law – for the Mozambique government to honor the purported guarantees of the ProIndicus and MAM loans”.
However, advisers to the government of Mozambique told Debtwire that, regardless of the circumstances under which the guarantees were authorised, the previously undisclosed debt should still be included in a restructuring.
“The government’s position has been consistent on the fact that all three loans – which were part of a coordinated financing plan – need to be included in the country’s external debt and in the restructuring process in order to achieve the government’s debt sustainability objectives and guarantee the equality of treatment of commercial creditors,” said Michele Lamarche of financial advisor Lazard.
While the three guarantees that were issued did exceed the amount of debt the government was authorised to issue under the budget, this does not necessarily render the loans unenforceable.
“Regarding the issue of disavowing the guarantees of MAM and ProIndicus, the government doesn’t agree with a simplistic analysis under English law, by which the guarantees are governed, that the guarantees may be disavowed simply because of possible legal issues under Mozambique law,” said Ian Clark of law firm White & Case.
“It is likely that litigation on this issue would be lengthy and complex. As a general matter, under English law it is possible for instruments to be considered enforceable despite problems relating to their authorisation under local law… Holders of the guaranteed loans no doubt have an equally strong opinion as the bondholders that they hold valid instruments,” he said.
At the time of issuance, the loan arrangers had secured favourable legal opinions from international law firm Clifford Chance and local law firm Couto, Graça e Associados.
The GGMB argues that a disavowal of the guarantees, which in one swoop would cut the government’s indebtedness by USD 1.2bn, would remove the need for the government to restructure its commercial indebtedness.
“Starting from the October presentation numbers, and adjusting for the improved economic trajectory and the benefits from disavowing the guarantees, the government no longer has the need to seek restructuring, because now they have more than sufficient payment capacity,” said Thomas Laryea, an adviser to the GGMB.
The bondholder representatives also point to improvements in Mozambique’s economy, including a strengthening currency, encouraging signs of increased international investment such as ENI’s investment in the Rovuma basin, and a one-off USD 350m tax payment the government will receive as the result of ExxonMobil’s acquisition of a stake in the ENI venture.
“We have now laid out a path where you don’t need to restructure the bonds, and avoid the dark recesses of international finance,” said Charles Blitzer, an adviser to the GGMB.
According to the GGMB’s press release, the country has added USD 850m to its debt service payment capacity over the next five years.
The Mozambique metical has strengthened against the US dollar by 18.5% since the start of the year, and by 30.7% since a record low in early October 2016. At time of writing MZN/USD stands at 0.01664. International reserves have risen from USD 1.7bn to USD 2.3bn since October, according to the GGMB statement.
While the government’s advisers concede that there have been improvements in the economy, they argue that the country’s debt situation is still unsustainable. “Just taking one metric out of many, the debt service to revenues is currently at 27% of GDP, when the IMF threshold [under the Debt Sustainability Assessment] is 15%,” said Lamarche.
“Fiscal performance remains in deficit, 6% of GDP last year, possibly improving to 5.5% assuming no further accumulation of arrears,” she said. The government does not have the capacity to pay the next coupon due in July under the 10.5% 2023s, Lamarche noted, and the benefits from the vast gas projects being undertaken in the country won’t be felt for some 10 years.
Amid the disagreement, there is one area of consensus between bondholders and the government: the timetable going forward will be driven by the IMF. Throughout the restructuring process, bringing the IMF back on board – along with international donors that accompany it – has been seen as a crucial step on the road to progressing discussions. The IMF has scheduled a visit to Mozambique for 10 July to 19 July.
Both sides now await the results of a Debt Sustainability Assessment being conducted by the fund. The Republic of Mozambique’s 10.5% 2023 notes are quoted today at 73/75.5 having dropped 1.75 points on the week, according to a trader’s run today. Mozambique is advised by Lazard and White & Case.