Moody’s changes outlook on Mozambique’s rating to stable, affirms the Caa3 ratings

MAPUTO (Capital Markets in Africa) – Moody’s Investors Service (“Moody’s”) has changed the outlook on the Government of Mozambique’s long-term issuer ratings to stable from negative and has affirmed the Caa3 issuer and senior unsecured debt ratings.

Today’s decision primarily reflects Moody’s expectation that in the restructuring of Mozambique’s sole outstanding international bond currently under negotiation, bondholders will likely incur losses as defined by the agency consistent with a Caa3 rating. Taking into account the inherent uncertainty surrounding the timing and final terms of the restructuring, the risks around the size of the eventual losses are broadly balanced.

All Mozambique’s country ceilings remain unchanged. The long-term foreign-currency bond ceiling remains at Caa2, the long-term foreign-currency bank deposit ceiling at Caa3, and the local-currency bonds and deposits ceilings at Caa1. The foreign-currency short-term bond and bank deposit ceilings remain at Not Prime (NP).

Rationale for the affirmation of the Caa3 rating
The government of Mozambique first defaulted in April 2016 following the exchange of notes issued by Ematum, a state-owned company, against the current existing bond, which Moody’s deemed distressed. In October 2016, a few months before the first coupon of the exchanged bond was due, the government announced its intention to restructure its debt, including the bond that was just issued. Since then, the government has not paid any coupon due, bringing unpaid coupons under the bond to $212 million as of now, according to Moody’s estimates.

Moody’s central scenario is for the bond exchange to proceed according to the broad terms announced by the government of Mozambique on 6 November 2018. Under this assumption, bondholders’ losses will likely be in a range of 20% to 35%, consistent with a Caa3 according to Moody’s definitions.

The terms of the bond restructuring announced by the government on 6 November 2018 entail the exchange of the existing $726.5 million bond maturing in 2023 against another $900 million bond with a lower coupon and longer maturity and a value recovery instrument, with the two instruments allocated on a prorated basis.

As of 6 November 2018, four of the five members of the Global Group of Mozambique Bondholders, which represent together 60% of the existing bond, had agreed in principle with the exchange. The government needs to obtain agreement from further bondholders to meet the 75% threshold under the collective action clause. It also needs to agree on the more detailed terms to complete the restructuring.

Upon the announcement of the terms of the restructuring, the price of the 2023 bond increased to 94% from around 84.5% in the previous few weeks; the price has been broadly stable and averaged 93.8% since then, indicating that investors see potential for higher recovery than previously priced in. An exchange with a bond price of 94% would correspond to an estimated loss of around 27%.

Rationale for the stable outlook
The stable outlook reflects Moody’s assessment that the risks around the eventual losses on the 2023 bond currently in default are broadly balanced, either side of a 20% to 35% range consistent with a Caa3 rating.

Even if the restructuring negotiations are derailed, the ultimate loss would likely remain within the 20%-35% range in Moody’s view. If investors were to reject the current terms, it is unlikely investors would countenance significantly larger losses than 35% in a subsequent negotiation. At the same time, Mozambique’s ultimate objective to enter a financing program with the IMF incentivizes it to achieve a meaningful reduction in its debt burden, suggesting ultimate losses of less than 20% are unlikely.

One source of uncertainty around the timing of the conclusion of the restructuring and ultimate losses relates to an ongoing investigation in the US over some Mozambique debts. At the current stage, Moody’s considers the possibility that the government may repudiate the bond as a result of the investigation to be low.

What could change the rating up/down
Moody’s would likely downgrade Mozambique’s Caa3 ratings if the losses for private creditors were increasingly likely to exceed 35% or if a renewed default pointed to such losses.

Conversely, Moody’s would likely upgrade Mozambique’s ratings if, after the completion of the current restructuring, it entered an IMF program that provided credible financial backing and increased the likelihood of reforms that improved government and policy effectiveness, thereby limiting future default risk for creditors. This would involve improved prospects for debt sustainability, as measured by the Fund.

GDP per capita (PPP basis, US$): 1,256 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.7% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.6% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -3.2% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -20.7% (2017 Actual) (also known as External Balance)

External debt/GDP: 142.5% (2017 Actual)

Level of economic development: Very Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 12 February 2019, a rating committee was called to discuss the rating of the Mozambique, Government of. The main points raised during the discussion were: The issuer’s institutional strength/ framework, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed. The calculations of the expected loss follow the rules of the Rating Symbol and Definitions guide.