International ratings agency Standard and Poor’s (S&P) has downgraded Mozambique’s long- and short-term foreign currency sovereign credit ratings to “SD” (selective default), thus implementing a threat it made several weeks ago.

The sole reason for considering Mozambique in default is the deal to swap the securities issued by the Mozambique Tuna Company (EMATUM) in 2013 for sovereign government bonds which will be repaid over a longer period, but at a higher interest rate.

The EMATUM bonds (or “loan participation notes”) were fully guaranteed by the government, and S&P said it regarded that guarantee as “a financial obligation on the government”.

S&P admits that the majority of the EMATUM bondholders accepted the swap, but the agency still “considers the offer to be a distressed debt exchange and tantamount to a default”. This is despite a huge increase in the interest Mozambique will have to pay on the bonds.

The interest on the EMATUM bonds worked out at 6.305 per cent, but the interest on the new government bonds is 10.5 per cent. The creditors will thus receive more money than they originally bargained for, but over a somewhat longer period, with the new bonds maturing in 2023.

However, S&P also upgraded Mozambique’s long-term local currency rating from “negative” to “stable”.

“The stable outlook on the long-term local currency rating signals our view that Mozambique faces balanced risks, specifically on its local currency debt, with a less than one-in-three probability that we would raise or lower the rating within the next 12 months,” S&P said in a statement.

S&P thinks it unlikely that the Mozambican government will restructure the debt denominated in meticais. It promises to look at Mozambique’s local and foreign currency ratings again, once the EMATUM debt swap has been finalized.

Source: NNN-AIM