Mozambique bondholders underwhelmed by circa 35-point NPV haircut; government pleads lack of payment capacity

Government of Mozambique bondholders are underwhelmed by the around 35-point net present value haircuts outlined yesterday (20 March) by the Ministry of Economy and Finance and its advisors, Lazard and White & Case. Three options were presented, with notional haircuts of zero, 10% and 20%. The Government pleaded no capacity on debt service (or for at least 12 years), rolling just half of the unpaid interest into the deal and offering very low interest rates. Worst still, there is no mechanism for upside participation, such as LNG warrants, say holders.

The presentation was outlined at a two-hour meeting at White & Case’s London offices scheduled to start at 2pm. It eventually started 25 minutes late, and there were plenty of pauses as the speaker from the MinFin consulted with legal advisors during his delivery, said one attendee.

"There were some pretty big discounts under the proposal. The general mood in the room was pretty negative. We are not happy with the proposal nor the fact that simply they can’t pay until the late 2020s at best," said another attendee. “This is only heading one way.”

The current GGMB position, according to advisors Charles Blitzer and Thomas Laryea, is that the restructuring guidelines are a total non-starter for bondholders. “We will convey that in a meeting today (21 March),” they added in a call with Debtwire.

Cold comfort

In common with the initial presentation for bondholders, given way back in October 2016, was an indication of a bleak macro and economic environment, albeit with some recent stability due to fiscal adjustments and the appreciation of the metical vis-à-vis the US dollar. But once more, the need to meet IMF debt sustainability criteria was presented, positing the need for a deep write-off to get debt metrics below IMF hurdles.

For example, according to the presentation, the present value of external debt in terms of GDP is expected to be 75% in 2018 rising to 82% in 2022, compared to the threshold of 40%. Present value of the debt to exports is around 200% in the medium term, and in terms of revenue 316% to 338% during the same period (250% threshold). It is also above the 20% threshold on terms of external debt service to exports and revenues.

In a presentation made to Debtwire and selected other media, Lazard, the government's financial advisors, said that the Mozambique had made necessary adjustments to reach primary balance until 2022, via a mix of tax-related measures and introduction of new taxes. Subsidies to state-owned enterprises are being phased out, with the objective of reaching primary balance by 2022, in line with IMF recommendations.

Number 3 haircut

However, the advisors added that the fiscal consolidation efforts are not enough to put the country out of debt distress, and therefore a debt restructuring is needed. As previously reported, the presentation set five guidelines for restructuring:

1. Very low coupon/ interest rate through 2023;
2. Coupon / interest rate beyond 2023 at moderate level; to address debt service constraints;
3. Haircut on past-due interest (and penalties as the case may be) and capitalization of balance;
4. Limited principal amortisation through 2028;
5. Instrument in local currency to be offered to domestic holders.

Thus far, three payments have been missed on the USD 726.5m 10.5% 2023 Eurobonds, which total around 18.7 points of principal. But under the proposed deal, only 50% of arrears (which currently total USD 136m) will be rolled over. Rough back-of-the-envelope calculations by Debtwire and market participants suggest a NPV discount of around 35 points.

The first option entails no notional haircut, exchanging into a new 16-year bond, with equal principal payments in years 14, 15 and 16; semi-annual coupon payments of 2% up to year five, rising to 3% in years five to 10; and 6% after 10 years.

The second option involves a 10% notional haircut into a new 12-year bond, with equal principal payments in years 10, 11 and 12. Interest is 1.5% up until year five and 5% thereafter.

The third option (capped in consideration of limited payment capacity) involves a 20% notional haircut into a new eight-year bond paying 2.8%, with equal principal payments in years six, seven and eight.

Three into one doesn’t go

Bondholders previously bemoaned the joining of the ‘secret’ loans from Proindicus and MAM into their debt deal. They argue that they previously provided debt relief under the exchange of their EMATUM bonds into sovereign guaranteed debt in April 2016. They maintain that the loans should be disavowed, and that the relief is enough to maintain the 2023 Eurobonds without any impairment.

The government has limited capacity to pay, therefore bondholders need to provide debt relief, said Ian Clark from White & Case. The exchange in 2016 was NPV neutral. “It was a liability management exercise, not debt relief,” he added.

Clark stressed the urgency and immediacy of reaching an agreement. “Bondholders will not agree to be in the same table as MAM and Proindicus, so we will understand that this will take longer. But we are treating them as the same class.”

VTB, which holds most of the MAM debt, had tried to negotiate its own deal ahead via the Ministry of Defence, as revealed by Debtwire last week. But the Ministry of Finance and its advisors are adamant that no deal was agreed.

There is no deal with VTB, said Adriano Maleiane, the economy minister. “As you may know, in Mozambique, to have a deal it has to be signed by the Ministry of Finance. I can assure that I haven't signed anything in that respect. There is no deal. Tomorrow we have a meeting with VTB and we expect their view on the illustrative proposals made today. But there is no deal.”

He added that there are no negotiations with bilateral institutions currently, as they have made sacrifices in the past under the HIPC initiative.

Lack of payment capacity, no warrants offered

Bondholders have previously refused to countenance haircuts pointing to the significant boost to the economy from LNG projects due to come on-stream from 2023.

The IMF’s DSA assumptions see nominal GDP rising by 50% to USD 19bn by 2023, up from USD 12.7bn in 2017, and the external DSA shows public external debt falling by 2027 to 33% of GDP in nominal terms and to 26% in PV terms, even under the baseline scenario (ie, not much fiscal adjustment), said Stuart Culverhouse from Exotix, in a research report from 15 March.

“This would argue for no restructuring at all, just some patience, but nor do we think it is credible not to pay bondholders for another five years,” added Culverhouse.

But yesterday (20 March), it was pointed out that the majority of LNG revenues won’t hit government coffers until around 2029, hence the need for interest relief. The payments are backloaded because of capital recoveries [for the projects]. Revenues to the government come much later on, from 2028 and 2029, said Maleiane.

Some holders had expected to see warrants to sweeten any deal, but these are not contemplated. “We need the capital gains from gas projects to fund our own infrastructure,” said the minister.

“We can't support the warrants as we have to reduce poverty. There is a big need for social and infra spending so that will be priority for economic development so that is why we opted out warrants,” he continued.

After the London meeting, the government and its advisors will hold one-on-one meetings today (21 March) with creditors individually. In the morning, they will meet with GGMB, and later in the day with Credit Suisse, VTB and Portuguese Millennium BCP, said Maleiane.

“We will issue a press release after that meeting,” said Blitzer and Laryea.

After the meeting, Mozambique’s 2023s fell 6 points to 77/83 bid-offer, according to a trader.