Mozambique Is About To Default On Its ‘Tuna Bond’ – Forbes

Mozambique is on the brink of default. Tomorrow, January 18th, a $59.8m coupon payment is due. The government says it won’t pay it. If it doesn’t, this will be Africa’s first sovereign default since Cote D’Ivoire defaulted on $2.3 billion of government bonds in February 2011.

The bond issue on which Mozambique is about to default is the $727m Eurobond, due January 2023. This is the bond issued in April 2016 to refinance Mozambique’s notorious ‘tuna bonds’.

Back in 2013, Mozambique’s state-owned fishing company, Ematum, borrowed $500m from Credit Suisse and $350m from Russian bank VTB to finance a new tuna fishing fleet. This was an extraordinary amount of money for the small African country: Bloomberg commented that it constituted 6% of Mozambique’s entire GDP. With the help of the two banks, plus the French bank BNP Paribas, Ematum then securitized the loans, slicing them into smaller chunks and issuing them as unlisted securities. These securities were the so-called ‘tuna bonds’.

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The tuna bond prospectuses described their purpose as ‘fishing infrastructure’. But the new tuna fishing fleet never materialized, though a lot of heavily armed patrol boats did. The Mozambique government later admitted that the bonds had financed the purchase of military hardware.

More importantly, the bonds proved unaffordable. Servicing the debt (interest and principal) required income of $260m per annum. But the yearly tuna catch fell far short of the 200,000 tonnes needed to make Ematum’s business model viable. In 2014, Ematum reported a loss of $25m: by the end of 2015, Ematum was in deep water and sinking fast.

The trouble was that Mozambique’s government had guaranteed the tuna bonds. If Ematum defaulted, the government would have to pay up – and it was in no position to do so. Mozambique’s public finances were worsening rapidly due to falling commodity prices and poor agricultural harvests, and it was making severe budget cuts to bring down its public deficit of over 11% of GDP. So in April 2016, the government offered to restructure the tuna bonds.

The restructuring was described at the time as ‘distressed’ by the ratings agency Standard & Poors, which downgraded the country’s credit rating to ‘selective default’. Nonetheless, the majority of bondholders agreed to exchange their tuna bonds maturing in 2020 for new interest-only Eurobonds with a maturity three years later. The gamble was that by then, the income from Mozambique’s recently-discovered natural gas reserves would enable it to repay the principal. You could call it a kind of interest-only mortgage.

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