‘Outrageous’ Mozambique debt deal could make 270% profit for speculators

• People of Mozambique to pay $1.7 billion to $2.2 billion on original loan of $760 million, which was not agreed by Mozambique parliament, and which has been of no benefit

The government of Mozambique has announced it has reached an agreement on a new debt payment plan to holders of some of the illegitimate debts which have plunged the country into a debt crisis.

Whatever way the deal is looked at, it is outrageous for the people of Mozambique. It leaves the Mozambique people paying between $1.7 billion and $2.2 billion for a $760 million loan which they have not received any benefit from. Meanwhile, companies who now own the debts are set to make large and potentially huge profits.

We estimate that the deal means that a company who bought the debt in 2016 could make a 50% profit if they sell the debt now, or up to 270% profit if Mozambique does repay as has offered over the next 15 years.

Water pump in Chinhagore, Mozambique. Credit: Senorhorst Jahnsen

Background
The debt comes from a loan of $760 million in 2014 to a Mozambique state owned company, Ematum. Campaigners in Mozambique say the loans were illegal because they were given without parliamentary approval. The loan was supposedly built to invest in a tuna fishing fleet, but $500 million has never been accounted for. The Mozambique government says it was spent on military equipment, but no evidence of this has ever been presented. The tuna fishing fleet sits unused in Maputo harbour.

The face value of the initial loan was $850 million, but $90 million of this was spent on “fees” to the banks which arranged the loan – London based branches of Credit Suisse and VTB Capital. This was a way to make it look like the loan had a lower interest rate than the reality. Of the $760 million that was actually lent, an independent audit found it had all gone to the fishing boat contractor in Abu Dhabi, none had ever entered Mozambique.

Unlike two other loans totaling $1.4 billion given by Credit Suisse and VTB, the loan to Ematum was publicly known about after it was given, with Credit Suisse and VTB selling the debt on financial markets as a bond. However, the government of Mozambique guaranteed to pay the debts if Ematum could not, without getting parliamentary approval, which makes the loan illegal under Mozambique law.

In 2016, shortly before the $1.4 billion of other debt became publicly known about, the Mozambique government agreed a restructuring of the loan, which reduced payments between 2016 and 2020, but increased them over the lifetime of the loan. Moreover, they brought the debt onto the government’s books, despite its illegality.

After the other debts became known about, Mozambique defaulted on all the loans between 2016 and 2017, including the debt which originally came from the loan to Ematum. Neither Ematum or Mozambique have made any payments since.

The default caused the price of the debt to fall on international markets. In late 2016 and early 2017, the restructured Ematum debt could be bought for between 55% and 65% of its face value.

The debt agreement
The agreement announced yesterday says that the Mozambique government will agree to repay all of the debt, plus the interest payments missed over the last two years. Moreover, it will pay 5.875% interest on both the principal and missed interest payments. And in a final kick in the teeth to the people of Mozambique, 5% of future gas revenues will be paid on top of the interest, up to a maximum of $500 million. The interest payments will begin from 2019, with the principal being paid between 2029 and 2033.

We have calculated that this leaves the Mozambique people paying at least $1.7 billion in total for the debt, rising to $2.2 billion depending on how much in gas revenue is also lost.
In contrast total payments under the original terms of the loan would have been $1.1 billion between 2014 and 2020, and under the first restructuring $1.4 billion between 2014 and 2023. Each time Mozambique restructures this debt, it agrees to pay more, albeit further into the future.

For a company which bought the debt when it was first lent they stand to make almost 200% more than they originally lent, or 65% more than if they had lent to the US government instead.
However, many of the holders of the debt did not buy the debt in 2014. For those who bought when Mozambique defaulted in 2016, they could make 270% more than if they had lent that money to the US government instead. Since the deal was announced the value of the Mozambique debt on financial markets has increased. Even if a 2016 buyer of the debt sells now, they will still make a profit of 50%.

What happens next
The deal the Mozambique government has announced is with four companies who own around 60% of the debt: Farallon Capital Europe, Greylock Capital Management, Mangart Capital Advisors and Pharo Management. If 75% of the holders agree to the deal, the rest will have to abide by it.

The deal has to be agreed by the Mozambique parliament, so it could still be stopped, if Mozambique parliamentarians are willing to stand up against such a bad deal for the people of Mozambique.

Negotiations over the other $1.4 billion of secret debt are still ongoing, but this deal is not a good sign of how much more the people of Mozambique may end up paying across all the illegitimate, unaccountable loans which were of no benefit to them.

The final question is why the Mozambique government would agree to such a bad deal? I have no answer. It is simply appalling.

Summary figures

Original loan
Amount originally lent: $760 million (face value $850 million, but $90 million of this ‘fees’ which were invented to reduce the headline interest rate)
Interest and principal to be repaid between 2014 and 2020: $1.1 billion

First restructuring in 2016
Interest and principal to be repaid between 2014 and 2023: $1.4 billion

Deal agreed in November 2018
Interest and principal to be repaid between 2014 and 2033: $1.7 billion + 5% of future gas revenues, capped at $500 million. So maximum of $2.2 billion in total

Potential profit:
In late 2016 and early 2017, $100 million of the Mozambique debt could be bought for $60 million. If the deal is implemented, this $60 million will return up $220 million. If it had been lent to the US government it would return $82 million over the same timescale. This is therefore a profit of 270%.

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