Mozambique may force bondholders to end a standoff and begin negotiations after the government said it will miss an interest payment on dollar bonds and will struggle to make debt payments throughout the year.
“Tactically, a payment delay may serve the government’s interests better if the aim is to force bondholders to negotiate,” Anne Fruhauf, the New York-based senior vice president at Teneo Intelligence who correctly predicted Mozambique would miss the payment, said before the announcement.
Investors, who formed a creditor committee last year, refused to start restructuring negotiations until the authorities publish an audited report detailing previously undisclosed debt and reach a deal with the International Monetary Fund. Now that the government says it won’t honor a $59.8 million coupon payment on Jan. 18, which would be Africa’s first sovereign default in five years, bondholders may abandon that position.
Mozambique’s finances have deteriorated, and the government’s capacity to make debt payments is “extremely limited,” the Ministry of Economy and Finance said in an e-mailed statement on Monday. The authorities are in talks with the IMF about resuming support to the southern African nation after it was suspended in April because of undisclosed loans.
The finance ministry told investors in October it needed to restructure its commercial debt.
The $727 million bonds due January 2023 fell to 55.1 cents on the dollar by 12:57 p.m. in London, having a reached a record low of 50 cents last week.
A group of bondholders was expecting the government to make the coupon payment, Charles Blitzer, a Washington-based former IMF official who’s advising the group, said last week. He declined to comment on government’s Monday announcement. Lazard Ltd. and White & Case LLP are advising the government on the restructuring.
Mozambique saying it won’t pay the coupon could be part of government’s “tough negotiating strategy” to compel bondholders to accept more lenient repayment terms, BMI Research, a Fitch unit, said in an e-mailed note. It won’t bode well for future negotiations, it said.
Government has a 15-day grace period to pay the coupon after Jan. 18, according to the bond’s prospectus.
“Mozambique seems to profess they over-borrowed and cannot pay,” said Marco Ruijer, who oversees about $7 billion of emerging-market debt at NN Investment Partners in the Hague and sold his Mozambique holdings in October. “The IMF wants them to reduce debt before they get a program, so they will proceed negotiating with bondholders in coming months.”
What remains unclear is how long the negotiations, which are yet to start, will take.
“The action today has an ambiguous impact on the speed of restructuring negotiations,” Koon Chow, a strategist at Union Bancaire Privee Ubp SA in London, said by phone Monday. “More important here is for the IMF to coax the issuer to be more constructive on the contents of talks and accelerate the talks as well.”