March17,20167:07pm

Emergingmarketdebt:Atrawlforyield
AndrewEnglandandElaineMoore

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Mozambiques$850mtunabondactsasacautionarytaleofthesectorsboom

Reuters

AtraditionalfishingboatheadsoutfromMaputoBayasthetunafleetsitsindocktotheleftofthepicture

T heeightsleek,militarygreypatrolboatssittingontheconcreteofMaputoportwouldnotlookoutof
placeinaJamesBondmovie.Theirmission?ToprotectMozambiquesnewfleetoftunafishingboats
fromIndianOceanpirates.

Butthevessels,whichhavebeenlargelyidle,arenowthefocusofamultimilliondollarinternational
controversy.Itisadisputethathasseverelystrainedthecoffersofthecashstrappedgovernment,rattled
donorsthatfundonequarterofthestatesbudgetandforcedMozambiquetoseekarestructuringofthedebt
usedtobuytheboats.

WhatwastohavebeenapositivemoveforthesouthernAfricancountry
thecreationofafishingfleettobreathenewlifeintoitseconomyhasinsteadshoneanuncomfortablelight
onthewaysinwhichdevelopingnationsutilisedebtandtheroleofinternationalbanksinlendingto,and
advising,frontiermarkets.
Boththepatrolandfishingboatswereboughtwiththeproceedsofa2013statebackedloanof$850mthat
manyobserversbelievedtheimpoverishednationcouldillafford,andwhichwasusedtocreateEmatum,a
statebackedtunafishingcompany.

Thedebtwaspitchedasaninvestmentinthefishingprojectbutasmuchas$500mofthefundinghasinstead
beenspentonsecurityequipmentincludingthepatrolboats.

Thevessels,whichincludethreeFrenchbuilt,43metreOceanEagletrimaransandahighspeed
InterceptorHSI32,outnumberthefleetof24tunafishingboats,accordingtoEmatumofficialswho
declinedtogiveexactnumbersasthevesselsarenowtheresponsibilityofthenavy.

Amidconcernsabouthowtoservicethedebt,thegovernment,underpressurefromtheInternational
MonetaryFund,tookon$500moftheloanin2015andassignedittothedefencebudget,sendingthestates
debtburdensoaring.

Withmostpublicdebtissuedinforeigncurrency,thetotalnowstandsatabout70percentofgrossdomestic
product,with6061percentinpublicexternaldebtincludingguarantees.

Thegovernmentisnowseekingtorelievethedebtburdenbypersuadingbondholderstoacceptarestructuring
thatwouldswaptheoriginalEmatumbondfornewpaper.RatingagenciesonWednesdaycutthecountrys
creditratingandwarnedthatarestructuringcouldbetantamounttodefault.
WecouldlowertheforeigncurrencyratingsonMozambiquetoselectivedefaultifweconsiderthe
investorswillreceivelessvaluethanthepromiseoftheoriginalsecurities,orifwebelievetheofferis
distressedratherthanpurelyopportunistic,saidStandard&Poors.

Recordborrowing

Inaninterviewbeforethedowngradesanddebtrestructuringwereannounced,AntnioDoRosrio,
Ematumschairman,defendedthecompany,insistingitisviableanddescribingthetunabusinessasa
developmentimperativetotakeadvantageofMozambiques2,500kmcoastline.

Toothers,however,thetunabondsagaisacautionarytaleofpoorernationsgettingsaddledwithdebtasthe
emergingmarketboomfuelledbyinvestorssearchingforyieldinanenvironmentoflowglobalinterest
ratescomestoanabruptend.

Borrowingbygovernmentsandcompaniesinemergingmarketshitarecord$1.4tnin2014,accordingtodata
companyDealogic.Butforinvestors,alreadyspookedbyfallingcommodityprices,aslowdowninChinaand
thestrongerUSdollar,theattractionofemergingmarketshasshrunk.

InFebruarytheBankforInternationalSettlementsreleaseddatashowingthatinthethirdquarterof2015,US
dollardenominatedcredittoemergingmarketsfellforthefirsttimesincetheglobalfinancialcrisis.Thedrop
comesascloserscrutinyisnowbeingpaidtoborrowers,withsomebeingaccusedofsquanderinginvestor
moneyandwastingtheopportunitytoboostgrowth.

Theproblemisthequalityoftheassetsthatwerefinancedbythedebtboom,saysHyunSongShin,headof
researchattheBIS.Alltheweaknessesaresuddenlybeinguncovered.

Thelifeoftheloan

TheIMFhasdescribedEmatumownedbythreestateaffiliatedentitiesasasourceofsubstantialfiscal
riskforMozambique.Oneoftheworldspoorestcountries,itissufferingadeepeningeconomicmalaise.Its
currency,themetical,lostathirdofitsvaluelastyearamiddelaysinmultibilliondollargasprojectsand
volatilityinemergingmarkets.
ThedebtwasoriginallyborrowedviaaspecialpurposevehicleforEmatum,anarrangementthatdoesnot
requirethesamelevelofdisclosureasasovereignbondissue.Itbeganlifeasa$500mloanwhichwasthen
soldontoinvestorsbyCreditSuisseandBNPParibas.Afurther$350mloanwasarrangedby
VTBCapital.

Theloanswererepackagedandsoldtoinvestorsasan$850mgovernmentguaranteed,sevenyearbondwith
acouponof6.305percent.Thebondsweresoldataslightdiscounttofacevalue,givinginvestorsan
attractiveeffectiveannualincomeof8.5percent.

Cruciallythetunabondsprospectusmakesnomentionofsecurityboats.Themainobjectoftheborroweris
thefisheryactivityoftunaandotherfishresources,includingthefishing,holding,processing,storage,
handling,transit,sale,importandexportofsuchproducts,thedocumentissuedbyVTBCapitalreads.The
borrowermaydevelopotheractivitieswhicharesubsidiaryorcomplementarytoitsmainobject,provided
thesearedulyauthorised.

InternationalinvestorsincludingDanskeBank,AllianceBernsteinandAberdeenAssetManagersaresomeof
thelargestholdersofthedebt,accordingtoBloombergdata.Weboughtthebondasaproxyfor
Mozambiquesovereigndebt,saysGregSaichin,chiefinvestmentofficerofemergingmarketdebtatAllianz.
ItwassupposedtogototheMozambiquenationaltunacompanytobuyboatsbutsadlyweheardinthe
aftermaththatagoodchunkofthemoneyendedupwiththeMozambiquenationalcoastguardtobuy
vessels.
Donorswerealsoenragedbytheaffairbothwiththebanksandthegovernment.Maputohasfaced
questionsaboutwhyitbackedtheoperationwithaloanguaranteethatbreacheditsownannualbudgetary
ceilingonexternalborrowingbymanymultiples.

IntheviewofoneforeignofficialinMaputoitwasthetaleofapoorcountrywantingtobuydefencesystems
thatitknewitcouldnotputinitsbudget,butalsolambastedtheroleofthebanks.

YoucancriticiseMozambiquefornotdoingproperplanningandsoforth,butthebankswerecharginghuge
commissions,theywerecompletelyopaque,theofficialsays.Iftheauthoritieshadtriedtogothrougha
regularroute[fortheloan]itwouldhavebeenimpossible.Donorswouldnothaveacceptedit.

CreditSuisseandVTBCapital,whichhavebeenhiredbythegovernmenttoarrangethebondrestructuring,
declinedtocomment,asdidBNPParibas.Mozambiquesfinanceministrydidnotrespondtodetailed
questions,sayingthegovernmenthadalreadyansweredinparliament.AdrianoMaleiane,thefinanceminister,
previouslytoldparliamentthathewantedtonegotiatealongerrepaymentperiodwithalowerinterestrate.

UnderitsrestructuringplanMaputoistryingtopersuadeinvestorstoreplacetheremaining$697mofexisting
2020Ematumbonds,whichareamortising,withdebtthatwillmaturein2023andpayinterest.Ithasgiven
investorsuntilWednesdaytosecureanearlyexchangedealofferingaratioof1.05newbondsforeveryold
oneexchanged.

Needfordevelopment

MrDoRosrioinsistsEmatumcanflourish.Hesaysthatofthe150vesselslicensedtofishtuna
everythingfromyellowfin,skipjackandbigeyeinMozambiquewaters,onlyonewasoperatingunderthe
countrysflag.

Weseealotofopportunityandwewanttostart[iton]anindustrialscale
...notanartisanalscalewithone,twoorthreeboats,MrDoRosriosays.Wewanttomakeapresence
andwewanttoexportbecauseweseealotofpotential.

ThecompanysaysitisalreadyexportingtoChina,SouthAfricaandPortugalandhopestohavesalesof
$36min2016.VictorBorges,thefishingminister,predictedlastyearthatthetunafleet,whenfully
operational,wouldhaverevenuesof$200mayear.ButanauditbyErnst&YoungrevealedthatEmatumhad
accumulatedlossesof$23muptoDecember312014.

TheIMF,whichprovideda$286memergencyloantoMozambiqueinOctober,hasdescribedtheunderlying
assumptionsinafeasibilitystudyonthefishingprojectasoverlyoptimistic.

MozambiquehasbeengovernedbyFrelimo,aformerMarxistliberationmovement,sinceindependencefrom
Portugalin1975.Thecountryranks178outof187ontheUNsHumanDevelopmentIndex,whichmeasures
everythingfromlifeexpectancytoeducationstandards.Ithasfewindustries,butvastnaturalgasdepositsoff
itscoastcouldtransformitintoamajorexporterofliquefiednaturalgas.

However,delaysinthegasprojects,thedropinpricesformanyofitscommoditiesfromaluminiumtocoal
andprawnsandtheslideinitscurrencyhavelefttheeconomyinafragilestateevenasitisexpectedto
expandat6.5percentthisyear.

Growthinemergingmarketshasalreadybeguntofallspectacularlysoinsomehighprofilecaseslike
BrazilandRussia.Withmanyeconomistsanticipatingalong,sustaineddescentintoslowergrowthrather
thanafullblowncrisis,especiallyifthereisfurthermonetaryeasingbycentralbanksinadvancedeconomies.
WearestillintheearlydaysofthepostQEworkout,saysCharlesCollyns,chiefeconomistattheInstitute
ofInternationalFinance.ForcountrieslikeMozambique,withnetforeignreservesofjust$2.1bn,thatcould
provepainful.

MrDoRosriodefendsthesecurityspendingasanecessarypartoftheoriginalproject.Wedidntjustbuy
theboats,weboughtacompletesystem,whichincludesseveralassets.Boats,fishingandpatrolones,
communicationandcontrolsystems,hesays.

Askedwhythenumberofsecurityvesselswaslargerthanthefishingfleet,hecountersbysaying:Whatis
thedamagethatonepirateattackcancausetothewholecountry?Formetohavethewholefleetof24boats
fishingintheoceanIneedtohaveasecuritysystem.

Investorsremainsceptical.MarcoRuijer,anemergingmarketdebtinvestoratDutchinvestmenthouseNN
InvestmentPartners,whichholdsthedebt,describesthesagaasshocking.

Theharshrealityofinvestinginthesemarketsisthatmoneycandisappear,hesays.Inthisinstancethere
isalackoftransparency.Iftherehadbeenastatementthatthemoneywouldbeusedformilitaryvesselsto
protectthecoastthatwouldhavemadesense,buttherewasnt.

AdditionalreportingbyJonathanWheatley

ThisarticlehasbeenamendedtocorrecttheattributionofaquotetoStandard&Poors

Sovereigndemand:Dollarstrengthisbarrierforfrontiermarkets

AcrosssubSaharanAfrica,acreditbingethatbeganin2007isshowingsignsofstrainasinvestorsquestion
thedurabilityofthecontinentsspectacularrecenteconomicgrowthanddemandtoknowwherethemoney
hasbeenspent.

Appetiteforsovereigndebtissuedbyfrontiermarketsintheyearsaftertheglobalfinancialcrisisalloweda
numberofAfricancountriestoplaceinternationalbondsforthefirsttime.Kenyabrokerecordsin2014with
thebiggestdebutbyanAfricancountryinabondthatwasfourtimesoversubscribed.Ghanawasableto
raise$1bnlastyearinspiteofheavyexistingdebt.
 However,weakeningcurrenciesandrisingratesincreditmarketsmeanborrowersonceabletoissuecheap
debtregardlessoftheirspendinghabitsarenowbeingfrozenout.

OnemonthafterSenegalraised$200min2009,workerswereputtingthefinishingtouchestoacontroversial
bronzestatuedesignedbyartistsinNorthKorea,estimatedtohavecostanywherebetween$27mand
$70m.Dakarwasabletoreturntomarketsin2011and2014butPresidentMackySallsplantotapmarkets
afourthtimehavebeenthwartedbyrisingcosts.

Kenyasplantoraisemoremoneyinthemarketshasalsofailedtomaterialise,whileRwandahasbeen
forcedtocancelaplannedsaleofdebt.In2009,thelandlockedcountrymadeplansforaconferencecentre
inKigalithatithopedwouldgivetourists,andinvestors,areasontovisit.Atthetime,borrowingthefundsin
dollarswouldhavebeenruinouslyexpensive.Butby2013,itwasabletomakeaspectacularentranceonto
themarkets,drawingbidsof$3bnfora$400mbondneededtofundthedelayedproject.Thisyear,however,
withthecentrestillunfinished,borrowingratesarenolongersoaffordable.ElaineMoore

RELATEDTOPICS High Yield Bonds, International Monetary Fund, Credit Suisse Group AG, Corporate bonds,
Sovereign Bonds

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