Mozambique Bondholders Push for Loan Repudiation--Update

By Matt Wirz Features Dow Jones Newswires

Fund managers who own Mozambique bonds are calling for the country to repudiate government guarantees on loans made to the country by Credit Suisse Group AG and Russia's VTB Bank.

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A recently released audit of the loans by investigations firm Kroll and a similar investigation by the Mozambican parliament show that there is no legal basis for Mozambique to honor guarantees on the loans made by the administration of former President Armando Guebuza, a group of bondholders said in a statement Thursday.

Mozambique defaulted on $762 million of bonds and about $1.2 billion of loans last year, sparking outrage among bondholders, who say they should be repaid ahead of owners of the controversial loans.

The bondholders' announcement marks an escalation in their previously private struggle with Mozambique and the banks that arranged the loans over how to restructure the country's debts.

Two companies owned by Mozambique's military borrowed the loans backed by government guarantees in 2013 and 2014 without public disclosure or parliamentary approval. A third state-owned company issued $850 million of bonds using similar guarantees in 2013, but bondholders in March 2016 agreed to delay repayment for three years in exchange for the conversion of their debt into sovereign government bonds.

Kroll found that the process for providing the guarantees was inadequate, violated Mozambican budget laws and may have involved conflicts of interest.

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The country's parliament said in a report last year that the guarantees breached the constitution and budget laws but voted in April to legalize the guarantees. The vote "was an administrative act that has no relevance on the government's decision whether to honor the guarantees," said Thomas Laryea, the lawyer for the bondholder group.

Bondholders have "misconstrued the findings of the Parliamentary Commission and the Kroll report," a VTB spokeswoman said. "The issued guarantees remain legal and binding obligations of the state."

A spokesman for Credit Suisse declined to comment. Mozambique's Ministry of Finance didn't return a request for comment.

Mozambique hired restructuring firm Lazard amid a financial crisis last fall to start restructuring talks, asking that its debts be reduced and that the bonds and loans be treated equally. Bondholders, including mutual-fund firm Franklin Templeton Investments and hedge funds Greylock Capital Management, NWI Management and Pharo Management, rejected the idea.

The bondholders Thursday proposed Mozambique resume payments to them with government revenues as the economy recovers. They also called for the loans to be repaid only with proceeds from a liquidation of the three state-owned firms that issued the original debt. More than $1 billion of the money raised by the companies remains unaccounted for, according to the Kroll report.

Such a restructuring would likely mean losses for holders of the loans -- a mix of the banks and private investors. Mr. Laryea says it would allow Mozambique to return to bond markets while addressing concerns of international donors, which have frozen loans to the country, and would "deal appropriately with the channels of illicit financing."

The group is also approaching donor countries and multilateral lenders including the International Monetary Fund for support. Representatives of the group presented their proposal to Paris Club member countries last week in Paris at the annual meeting of the informal organization of donor countries.

Disclosure of the loans last year by The Wall Street Journal prompted some donors to freeze aid to Mozambique pending a thorough investigation. The IMF called the Kroll report an important step but said that "information gaps remain, in particular on the use of the loan proceeds," in a statement last week.

Mozambican watchdog group the Center for Public Integrity, or CIP, in a statement Thursday called for criminal proceedings against parties involved in the debt deals. "The Mozambican state should not pay the debts contracted by the three companies," CIP said.

Matina Stevis contributed to this article.

Write to Matt Wirz at matthieu.wirz@wsj.com

(END) Dow Jones Newswires

June 29, 2017 15:43 ET (19:43 GMT)