Mozambique is trying to swap a bond with a biannual principal repayment structure into a new note that shifts payment to a one-off event at maturity, in a bid to ease repayment pressure.
People close to the deal insist this does not count as a debt restructuring.
Mozambique, rated B2/B-/B, has asked holders of bonds in government-owned tuna fishing company Ematum to swap the debt for a new US dollar-denominated 2023 note.
“The amortisation is killing them,” said a syndicate banker. “The main thing for Mozambique is to take the amortizing structure out.”
Trieu Pham, CEEMEA strategist at Mitsubishi UFJ Securities, said: “The bullet structure will take some pressure off. The amount of debt is unsustainable at these levels with an amortising structure.”
The old bonds, which have US$697m outstanding, pay a 6.305% coupon and are due to mature in 2020. Issued through a special purpose vehicle called Mozambique Ematum Finance, the notes pay investors US$76.5m, plus interest, twice a year for the life of the bond.
“For Mozambique it is too burdensome for their growth profile to pay back that much semi-annually,” said a person close to the issuer.
The government’s external debt amounts to 60% of GDP, according to Pham at MUFG.
Bite the Bullet
The new bonds will have a bullet structure, meaning Mozambique repays the entirety of the principle in one go when the notes mature.
However, this exposes a new risk, as investors would need to feel certain that Mozambique will have the money to pay the full amount in 2023.
“The bullet structure isn’t a bet on Mozambique’s growth,” said the person. “It’s a bet on liquefied natural gas.”
Mozambique has LNG assets valued at around US$100bn, according to analysts. Some of this is expected to become monetised in the coming years – before the new 2023 bond matures.
But the country has yet to export any LNG. US firm Anadarko, one of a handful of companies seeking to tap Mozambique’s LNG reserves, is aiming to have its first LNG cargo leave Mozambique by the end of the decade, the company told Reuters in October 2015.
The commodity-producing country’s GDP is expected to have grown by 6.3% in 2015, and 6.5% in 2016 – a figure that the International Monetary Fund called “below potential” in a December review.
“Over the medium term,” the IMF said, “growth is projected to recover to 7.5%-8%, supported by massive investment in natural gas projects and higher coal production.”
The sovereign is offering new bonds at a cash price of 80 to investors who respond before the early deadline of March 21, 2016.
This sent confusion rippling through the markets, as analysts thought it meant a 20% haircut on principle, but people close to the issuer insist this is not the case.
The new notes are offered at a four-point premium to where the Ematum bonds were trading before the exchange announcement, and the new notes will be redeemed at full value when they come due.
“If you had 10 bonds before the exchange, you’re still going to have 10 bonds after the exchange,” said a second person with close knowledge of the transaction. “There is no restructuring or cram-down for investors.”
Nonetheless, rating agencies might still see the exchange offer as a default as it includes a maturity extension, according to a bank analyst.
Mozambique has to get 75% of investors voting on the exchange – and 75% of those voting agreeing – for the exchange to go ahead.
But if it does go ahead, anyone voting not to exchange will have their debt forcibly exchanged into the new notes.
The Ematum bonds – Mozambique’s first foray into international capital markets – were mired in controversy after they were sold in 2013. Many investors thought the proceeds were being used solely to build a state-owned tuna fishing fleet, but a portion was used to bolster maritime security.
“The old bonds have got a lot of bad PR about them,” said the second person. “This is a way to wipe the slate clean and for Mozambique to start again with a new benchmark deal.”
Because the new bonds will be issued directly by the state and not an SPV, they will be eligible to join JP Morgan’s widely followed EMBI index.
The coupon on the proposed new bond is expected to be revealed next week after the issuer gathers market feedback.
Credit Suisse Securities and VTB Capital are dealer managers on the exchange. The final deadline is March 29.