Sunday, January 15, 2017

Bondholders Say Mozambique Will Pay as JPMorgan Sees Default
by Paul Wallace  and Matthew Hill
January 13, 2017, 6:38 AM EST

‘Market’s overreacted in spades,’ says bondholders’ adviser; Mozambique bonds and currency will fall if it defaults: Teneo; Will Mozambique default or not?

JPMorgan Chase & Co. says the African nation is poised to miss payment on a $60 million coupon next week, but a former International Monetary Fund official who’s advising bondholders insists the government has the money.

“It’s in the interest of Mozambique, as well as the bondholders, for the government to pay the coupon,” Charles Blitzer said in an e-mailed response to questions. “I can’t see any good consequences if it doesn’t. The market has overreacted in spades.”

The country’s $727 million of bonds sank to a record after JPMorgan analysts said the government’s rhetoric implies it’s “highly unlikely” to make the payment on Jan. 18.

Mired in a financial crisis after commodity revenue plummeted and the IMF cut aid, Mozambique said in October it would seek to restructure the Eurobond as well as $1.4 billion of government-guaranteed loans to two state companies. Lazard Freres & Co., which represents Mozambique along with law firm White & Case LLP, said the government would have no money left over for debt payments in 2017, including those on the Eurobond.

That sparked a stand-off with bondholders, who formed a creditor committee to argue their case for preferential treatment over other creditors on the grounds that the state guarantees on the loans may be illegal.

“The situation in Mozambique has improved since October,” said Blitzer, who’s advising creditors including Franklin Templeton and AllianceBernstein LP. “In recent months capacity to pay has improved as both the exchange rate and reserves have stabilized and begun to move up.”

The January 2023 bond, which fell to a record 50 cents on the dollar on Jan. 11, was quoted at 54 as of 1:15 p.m. in Maputo, the capital, still down 6 cents from last week. The yield is 26.1 percent.

While the government hoped to finalize a restructuring by Jan. 18, it still hasn’t started formal discussions with the bondholders. There’s a 15-day grace period to settle the coupon payment, according to the prospectus.

Debt Audit

“There’s nothing on the record to indicate they’ve made a decision to not pay this coupon,” said Blitzer. “There was nothing like that said in the restructuring presentation. The creditor committee remains open to discussions of its views and analysis of various issues, but negotiations could begin only after the various preconditions are in place.”

The bondholders have said talks should be held off until an audit of the state companies, which New York-based risk analysis firm Kroll is conducting, is published and a new IMF aid package is in place.

The IMF will “continue to engage with the government to overcome the number of challenges that they face,” spokesman Gerry Rice told reporters in Washington Thursday.

While there’s still a chance that Mozambique will pay the coupon to avoid credit rating downgrades, it will probably decide not to, according to New York-based Teneo Intelligence.

“The crisis has become so entrenched that absent improved political resolve, Mozambique remains likely to drift into default,” Teneo’s Senior Vice President Anne Fruhauf said. “The assumption is that because the crisis is so bad already it won’t matter much. But that’s a mistaken assumption. There will be ratings actions, the currency may take a hit, the bonds will fall.”

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