With over-subscribed new issuance the new normal in this 'reach for any yield' world, perhaps the rapid demise of Mozambique will remind some greater fools that 'high' yields are high for a reason.
As we warned 4 months ago, Mozambique has a broad swath of problems within its governing councils. Back in December of 2005, Management Systems International based out of Washington issued a report titled CORRUPTION ASSESSMENT: MOZAMBIQUE which said point blank: “The scale and scope of corruption in Mozambique are cause for alarm”.
Mozambique's head of state Joaquim Chissano left office in February 2005 after 15 years. His replacement, Armando Guebza, that same year opened Mozambique's coastline to international companies seeking to search for resources. Between 2005 and 2006 three firms were able to capture rights to explore the coast, Anadarko, Italy's Eni, and Petronas. Some 75 trillion cubic feet of natural gas was discovered and this set of a a blitz into Mozambique as international banks, corporations, and organizations flooded the area. This opened a breeding ground for corruption and unregulated financing, specifically the controversial Tuna Bond that was supposed to be used to support regional fishing and was instead used for military expenditures and to purchase some 40 boats that remain anchored to this day.
Since then, the New Metical has crashed hyperinflation-like to record lows against the dollar…
In June, The IMF blamed “undisclosed loans” for Mozambique's sudden surge to 86% Debt/GDP ratio.
“Mozambique's economic growth will likely slow to 4.5 percent in 2016 from 6.6 percent the previous year due to rapidly rising inflation and growing government debt, the International Monetary Fund said on Friday. The leader of a Fund team that visited the southern African country, Michel Lazare, said the discovery of more than $1 billion of previously undisclosed government debt would increase pressure on the economy.”
Which seemed to spark dip-buying in the bonds…until today (as Bloomberg reports)
Mozambique is in “debt distress,” according to the International Monetary Fund’s criteria, and plans to start talks with creditors in coming days.
The southern African nation has appointed Lazard Freres SAS and White & Case to “engage in a constructive dialogue with creditors,” it said in a presentation to investors dated Oct. 25 and posted on the Finance Ministry’s website. The government aims to achieve ‘debt sustainability’ with the agreement of creditors before starting talks about an International Monetary Fund loan, it said.
The yield on Mozambique’s $727 million of Eurobonds due 2023 jumped 554 basis points to 20.78 percent by 5:22 p.m. in Maputo, the highest on record.
The country’s debt ratio will reach 112.6 percent of GDP this year after $1.4 billion in previously undisclosed loans were uncovered in April, the IMF said in a report posted to its website today. Government already this year restructured over $800 million in loans it received for a fleet of tuna fishing vessels, repackaging the debt as a $727 million of Eurobonds.
Any new restructuring will be complicated by the existence of about $1.2 billion in loans Credit Suisse and VTB secretly made to other Mozambican state-owned companies and then resold to other investors. It is unclear how holders of the loans would be treated compared with bondholders. As WSJ reports,
Several creditors who financed the borrowings to the state-owned businesses said they are considering litigation. They spoke on condition of anonymity because they weren't authorized to talk to the press.
In their crosshairs isn’t just Mozambique, but also Credit Suisse and VTB, the two banks that arranged the loans and are currently being investigated by authorities in the U.K. and Switzerland over their conduct.
Both banks deny wrongdoing, as does the Mozambican government, which blames its troubles on the delays in bringing its vast gas reserves online because of low global energy prices.
Mozambique full investor presentation…