Mozambique Eurobond Default Heralds Lengthy Uncertainty, Fitch Says

MAPUTO (Capital Markets in Africa) – Fitch Ratings-London-20 January 2017: Mozambique’s failure to pay USD59.8m in interest on a sovereign Eurobond points to an extended period of uncertainty as the country seeks to restructure its debt, Fitch Ratings says. It has no sovereign rating impact because Fitch already downgraded Mozambique’s Long-Term Foreign Currency Issuer Default Rating to ‘RD’ in November after confirmation that a state-owned enterprise missed a payment on a sovereign-guaranteed loan in May 2016.

Mozambique’s Economy and Finance Ministry announced on 16 January that it would not make the payment on its 10.5% dollar-denominated bond maturing in 2023. The Ministry said that Mozambique’s debt payment capacity is extremely limited in 2017, and does not allow room to make the scheduled interest payment. This indicates that payment during the 15-day grace period is unlikely.

A presentation to creditors published by the Mozambican authorities late in October 2016 implied a potential renegotiation of external debt to private creditors. The presentation said that Mozambique’s primary objective is “to resume relations with the IMF… to stabilize the economy and restore [the] confidence of the international community,” but this would require putting government and government-guaranteed debt on a sustainable path.

However, it is unclear when and how negotiations with creditors might proceed. Bondholders still want details of potential IMF support and an audit of Mozambique’s SOEs to be completed before they will discuss debt restructuring, Bloomberg said today, citing an advisor to a group of bondholders who added they might hold “preliminary talks”. It is unclear how potential inter-creditor disputes may play out.

The process of curing Mozambique’s default is therefore likely to be protracted. If Mozambique completes a debt restructuring with private creditors and issues new securities, we would raise its IDR from ‘RD’. Ratings would be assigned to the new securities to reflect our assessment of Mozambique’s credit profile. The Eurobond contains a collective action clause, in which any modifications or actions (including payments) may be made with the consent of 75% of bondholders.

An important component of our assessment would be whether debt to multilateral financial institutions and bilateral lending is rescheduled or restructured, as this represents around 83% of total external public debt (of which a quarter is held by the World Bank). Public debt has increased at one of the fastest rates of all rated sovereigns in the past three years, partly due to depreciation of the country’s currency (the metical), and was 130% of GDP at end-2016, double the ‘B’/’C’/’D’ median.

Restructuring of only commercial debt would leave Mozambique with relatively high public sector debt.

Recent rebounds in commodity prices may offer some support to Mozambique’s fiscal and external position in 2017, as would fresh IMF support. But our assessment would also take into account the recent history of very weak debt management and transparency.