Mozambique’s tuna bond saga drags on

Author: Lizzie Meager | Published: 15 Dec 2016
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Mozambique's government is struggling to reach consensus with a group of bondholders over a commercial debt restructuring plan. It might be the first case in a new wave of emerging markets gone wrong.

The plan relates to what began as $850 million of so-called tuna bonds, which global investors originally bought from the government back in 2013 to fund a tuna fishing fleet. But while the money was supposed to go to state-owned firm Ematum, it became clear some months later that $500 million of it had been used to buy ships for the navy.

In April this year it emerged that the government had, in addition to the bonds, secretly taken out two loans worth a total of $1.1 billion, arranged by the London branches of Credit Suisse and Russian bank VTB. Both the UK's Financial Conduct Authority and Switzerland's Finma launched early-stage inquiries into the loans in the summer, but the result is not yet known.

These loans, made in 2013 and 2014, were also for state-owned companies, and were also used to fund defence equipment.

The government 'accidentally’ presented the debt reprofiling as a restructuring

Charles Blitzer, previously of the IMF, is advising the bondholders' committee. He told IFLR that bondholders will happily enter negotiations with the government when it follows best practice for sovereign debt restructurings, referring to the fact that the IMF hasn't yet carried out a full audit.

"Negotiating the debt relief before the IMF has prepared a programme is a little premature, and against general principles for sovereign-creditor relations," he said. "The bondholders still have an infinite number of questions around the two secret loans."

Fundamental to the issue is the legality of the loans. They're governed by English law, so the applicable law can't later be changed to alter the structure. And although guaranteed by the government, they weren't approved by parliament – which puts them in breach of the country's constitution. Whether or not they constitute odious debt will be uncovered in the audit.

When the undisclosed loans were uncovered, the IMF and other donors subsequently withdrew their support of the country. This coupled with commodity prices where they are, and a rapid currency devaluation have put the pressure on.

Blitzer's bondholders have also argued that the restructuring is not necessary in the first place since it already happened earlier this year. But according to White & Case partner Ian Clark, they weren't restructured, they were reprofiled. Debt reprofiling is a common preventative technique that extends the maturities of notes without reducing the principal.

Creditors swapped their Ematum tuna notes for new direct sovereign obligations maturing in 2023, with an increased coupon. According to local news reports, the government 'accidentally' presented this as a restructuring. The government's plans to treat all creditors equally, or pari passu, has further damaged its relationship with the bondholders.

Another of the bondholders' gripes is the breadth of creditors on whom the burden of the restructuring will fall. Only 20% of Mozambique's debt is commercial. The remaining is provided by multilateral lenders and the official sector, both of which historically don't participate in sovereign debt restructurings.




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