LONDON – A group representing the majority of holders of Eurobonds issued in 2013 to raise funds for the Mozambique Tuna Company (EMATUM) have rejected all the proposals put forward by the Mozambican government on Tuesday to the holders of the commercial debt.

According to the legal adviser to the Global Group of Mozambique Bondholders (GGBM), Thomas Laryea, from the law firm of Cooke Robotham, this is a non-starter for the Eurobond holders”. The group claims it represents or has the backing of more than 80 per cent of holders of the Eurobonds who funded a loan of 850 million US dollars to EMATUM, a company with very few assets and no prospect of ever being able to repay its loans.

This debt was part of more than two billion US dollars of loans taken out in 2013 and 2014 for three Mozambican State-owned companies — Ematum, Proindicus and MAM (Mozambique Asset Management) — which were set up essentially by the State Security and Intelligence Service (SISE).

While the Proindicus and MAM loans came straight from the European banks concerned, Credit Suisse and VTB of Russia, the loan to Ematum took the form of a bond issue on the European bond markets.

In April 2016, the Mozambican government ratified a deal under which the EMATUM bonds were replaced by sovereign government bonds with a longer repayment time, but at a higher interest rate.

The original repayment terms were extremely tough with the money to be repaid over seven years, with a two-year grace period, and at an interest rate of LIBOR (London Inter-Bank Offered Rate) plus 6.5 per cent.

The proposal accepted by the bondholders is that the EMATUM bonds (now down to 697 million dollars, after the first repayments) would be swapped for government bonds for 585.5 million dollars that mature in 2023. The interest rate, however, shot up to 10.5 per cent.

This deal was reached just a couple of weeks before the true scale of the illicit lending became clear. The former government, under President Armando Guebuza, had kept the Proindicus and MAM loans completely secret even though they amounted to over 1.1 billion USD.

All three loans had been illicitly guaranteed by the Guebuza government, in violation of the 2013 and 2014 budget laws, and of the clause in the Mozambican constitution which states that only the country’s parliament, the Assembly of the Republic, can authorise such debts.

When the true scale of the loans became clear, the International Monetary Fund (IMF) suspended its programme with Mozambique. Other western partners followed suit, and all 14 donors who used to provide direct support to the State budget halted their disbursements. Thus Mozambique suddenly found itself facing a huge hole in its budget, since the budget support amounted to hundreds of millions of dollars a year.

Under such circumstances, there could be no question of honouring the illegal guarantees for the Ematum, Proindicus and MAM loans. At a meeting with creditors in London in October 2016, the government said it was quite impossible to pay any interest, let alone principal, on the commercial debt for years to come.

Maleiane repeated that message to the creditors at another London meeting on Tuesday. He rejected the attempt by the Ematum bondholders, based on the April 2016 deal, to secure any preferential treatment. The bonds (now renamed MOZAM2023 bonds) will be treated in exactly the same way as the Proindicus and MAM loans.

Maleiane told the Tuesday meeting that, although there is no way that Mozambique can pay anything in the immediate future, as from 2023 there could be moderate levels of interest payments and limited payments of the principle. Creditors will be expected to take a haircut, by writing off half of the arrears on interest payments.

The Mozambican government offered three scenarios, with repayment levels ranging from eight to sixteen years. The bondholders rejected all of them.