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Mozambique proposes ‘tuna’ bond restructuring

  • Proposed terms will cut debt but increase interest rate, leaving Mozambique no better off, despite crash in commodity prices reducing ability to pay

Mozambique is trying to restructure the terms of a bond it issued in 2013 to borrow $850 million, at 6.305% interest rate.* At the time the money was borrowed, it was said it would be used to invest in a tuna fishing fleet, through state controlled company Ematum. However, it has now come to light that at least $500 million was used for military spending, under the claim that this was needed to protect the fishing fleet from piracy. The bond is owed under English law. The bond was not agreed by the Mozambique parliament so its legal status under Mozambique law is questionable.

Small-scale traditional fishing boats in Maputo, capital of Mozambique, with the city rising behind (Cordelia Persen / Flickr)

Small-scale traditional fishing boats in Maputo, capital of Mozambique, with the city rising behind (Cordelia Persen / Flickr)

Mozambique is offering to increase the interest rate to 11% in return for a 20% reduction in the size of the principal owed on $697 million of the bonds (the other $153 million will remain unchanged). If this offer is accepted, the annual interest cost on the bonds will actually increase from $53.6 million to $71 million. What Mozambique will gain is paying $139 million less on maturity. Furthermore, the bond was due to mature in stages between 2016 and 2020, whereas now no principal will be repaid on the restructured bonds until 2023. The overall impact is likely to be to slightly reduce debt payments from 2016-2019, significantly reduce them in 2020, then have much higher debt payments than previously planned from 2021-2023.

Overall this means Mozambique will pay the same amount between 2016 and 2023 as it would have done between 2016 and 2020. Reuters report that Luc D’hooge, Head of Emerging Market Bonds at Vontobel Asset Management, who plans to accept the offer, said: “It is a good deal for the investors and it is a good deal for Mozambique – to me it looks very fair“.

Just a few weeks ago, holders of the bond were earning significantly less than the government is now offering, with the bonds being sold by speculators at close to 75 cents in every dollar.

Jubilee Debt Campaign has previously warned of the debt risks facing Mozambique after a lending boom based on expectations of large revenue growth from extractive industries such as coal and liquefied natural gas. Mozambique’s external government debt has increased from 33% of GDP in 2011 to 63% in 2015, partly because of the large amounts of lending, and partly due to the Mozambique Metical falling 40% against the US dollar since the start of 2014. Moreover, the large borrowing by private companies in Mozambique mean it is the most indebted country (as opposed to government) in the world, with net external liabilities of 180% of GDP.

The fall in the Metical has been driven by the crash in prices for Mozambique exports such as oil, coal and gas, along with the claimed boom in production in some commodities not matching wild predictions. Mozambique is back on an IMF programme where $285 million of IMF loans over 18 months are effectively paying the interest on the bonds, plus some other debt payments.

Bondholders have a deadline for 23 March to respond to Mozambique’s offer to get the 11% interest rate, and 29 March for a reduced 10.5% rate. Given the generous terms compared to previous market conditions, it is likely more than 75% of the bondholders required to enforce the deal will accept, which will mean it will apply across all bondholders.

The Mozambique government had previously said they wanted to increase the maturity and reduce the interest payments, which they have failed to do. Instead, effectively no financial cost is falling on speculators through the restructuring. To have actually saved money, Mozambique would have needed to credibly threaten defaulting on the bond. Given the economic situation and failure to diversify away from volatile commodities, Mozambique may need to both threaten and actually default between now and 2023.

* The bonds were actually sold at a discount meaning that the effective interest rate received by the original buyers was 8.5%, and Mozambique received less than $850 million.

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Mozambique, United Kingdom
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