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Mozambique – can someone take responsibility?

By Virginia Furness
11 Jul 2017

Mozambique’s debt crisis is the latest financial market hot potato to be passed around by its stakeholders with a series of statements that would not look out of place in an election campaign. But with the IMF in the country and Mozambique’s future ability to pay looking ever more likely, it is time to reach an agreement, restructure and move on.

The origins of the crises are complicated enough — $1.4bn of hidden loans discovered through a debt exchange in April 2016 for a bond that was meant to finance tuna ships, and ended up financing warships and goodness knows what else — without the added complication of the blame game. No party to the original agreement — from loan providers VTB and Credit Suisse, the country’s bondholders, the International Monetary Fund (IMF), forensic auditor Kroll and the Mozambican government — seems free of recriminations.

Kroll, which on May 12 published the long awaited findings of its independent audit of Mozambique’s debt found, not surprisingly, some $500m of funds unaccounted for. It blames incomplete data and unsatisfactory documentation and, by association, Mozambique’s poor administrative regime. 

The report also brings up a further list of targets for blame, from overinflated warship prices to government figures.

VTB and Credit Suisse blame Kroll for “misleading” statements about fees paid to them for loan services rendered. Credit Suisse took pains to stress that the “reporting that Credit Suisse realised $100m or more in ‘arranging’ fees is incorrect and misleading.”

“Banking fees for Credit Suisse totalled $23m – roughly 2.3% of the total financings, which is in line with comparable emerging market financing transactions,” it added in an emailed statement.

For their part, the Global Group of Mozambique Bondholders (GGMB) most recently (June 29) blames the Mozambican legal system, arguing that there was no basis “in either Mozambican or English law for the Mozambique government to honour the purported guarantees of the ProIndicus and MAM loans”.

VTB issued more of the same in response, blaming the GGMB for “misconstrue[ing] the findings of the Parliamentary Commission and the Kroll report” regarding the legality of its loans to the three Mozambican companies.

“The loans to ProIndicus and MAM were recognised as public debt and the issued guarantees remain legal and binding obligations of the state,” it said in a statement.

Blame game round 2

Back to the bondholders who blame the whole start of this sorry saga on VTB and Credit Suisse. They believe the banks should have been more upfront when arranging the exchange of Ematum bonds into sovereign-guaranteed debt, about the existing, and sizable, loans they held on a bilateral basis, with government companies ProIndicus, MAM and Ematum.

Ex-bondholder Roy Scheepe, senior client portfolio manager at NN Investment Partners, said that banks have a responsibility regarding the transparency of their position in such cases.

“We did not get all the information that was available,” he said. “The banks were not transparent in the role they had played. You have to do due diligence as well as you can, but sometimes people don’t act in good faith.”

Then there’s the IMF, which has been dragged through the mud over administrative incompetence. Emails unearthed by Bloomberg suggest that an IMF representative had contacted a finance ministry official regarding the ProIndicus loan in May 2015. Why had this not filtered up through the IMF to the country head?

Kroll also discovered in its report that Credit Suisse had made it a “preceding condition” that the IMF knew about the loans it was providing before it would approve the loan financing.

And all of this runs alongside the still outstanding question of why the government borrowed so much money for companies that are, in the words of the report, “inadequately managed, not fully operational”, and that have generated “no revenue” nor have any contracts in place to ensure future revenue.

A lot of what is in the public domain is likely to be posturing: talking one’s book to ensure a better deal when the resolution comes.

But while there are questions about Mozambique’s willingness to pay, there is improving sentiment around its ability to pay.

The silver lining

Mozambique sits on huge potential as an exporter of natural gas, with its first gas extraction expected in 2022. The government will receive $350m later this year in capital gains tax, related to the recent ENI/ExxonMobil gas field transaction. 

The GGMB estimates that the government’s debt service capacity has improved by $850m over the next five years.

Analysts suggest this is another reason why bondholders and creditors are digging their heels in. But upcoming cash is no reason to do so.

There are many different ways to restructure a bond as one analyst explains. “The present value basis will be treated the same, but it doesn’t mean the new instruments will look the same. You could have a situation where you don’t get paid for three years, and get more at the end of it.”

Of course, all may be resolved when the IMF returns from Mozambique on July 19. But enough mud has been slung, and all parties should get down to the business of restructuring, which will allow Mozambique to put this 15 month struggle to bed at last.

By Virginia Furness
11 Jul 2017