THE eight sleek, military-grey patrol boats sitting on the concrete of Maputo port would not look out of place in a James Bond movie. Their mission? To protect Mozambique’s new fleet of tuna-fishing boats from Indian Ocean pirates. But the vessels, which have been largely idle, are the focus of a multimillion-dollar international controversy.
It is a dispute that has strained the coffers of the cash-strapped government severely, rattled donors that fund one quarter of the state’s budget, and forced Mozambique to seek a restructuring of the debt used to buy the boats. What was to have been a positive move for the country — the creation of a fishing fleet to breathe life into its economy — has instead shone an uncomfortable light on the ways in which developing countries use debt and the role of international banks in lending to, and advising, frontier markets.
Both the patrol and fishing boats were bought with the proceeds of a 2013 state-backed loan worth $850m that many observers believed the impoverished country could ill-afford, and that was used to create Ematum, a state-backed tuna-fishing company. The debt was pitched as an investment in the fishing project, but as much as $500m of the funding has instead been spent on security equipment — including the patrol boats.
The vessels outnumber the fleet of 24 tuna fishing boats, Ematum officials say. Amid concerns about how to service the debt, the government, under pressure from the International Monetary Fund (IMF), took on $500m of the loan last year and assigned it to the defence budget, sending the state’s debt burden soaring. With most public debt issued in foreign currency, the total now stands at about 70% of gross domestic product, with 60%-61% in public external debt, including guarantees.
The government is seeking to relieve the debt burden by persuading bondholders to accept a restructuring that would swap the original Ematum bond for new paper.
Rating agencies last week cut the country’s credit rating and warned that a restructuring could be tantamount to default. “We could lower the foreign currency ratings on Mozambique to ‘selective default’ if we consider the investors will receive less value than the promise of the original securities, or if we believe the offer is distressed rather than purely opportunistic,” said Moody’s, as it cut the country’s rating from B2 to B3, with a negative outlook.
S&P issued a rating downgrade from B-to CC, one notch above default status.
Before the downgrades and debt restructuring were announced, Ematum chairman António Do Rosário, defended the company, insisting it was viable and describing the tuna business as a “development imperative” to take advantage of Mozambique’s 2,500km coastline. To others, however, the “tuna bond” saga is a cautionary tale of poorer countries getting saddled with debt as the emerging market boom — fuelled by investors searching for yield in an environment of low global interest rates — comes to an abrupt end.
BORROWING by governments and companies in emerging markets hit a record $1.4-trillion in 2014, according to data company, Dealogic. But for investors, already spooked by falling commodity prices, a slowdown in China, and the stronger US dollar, the attraction of emerging markets has lost its shine.
Last month, the Bank for International Settlements (BIS) released data showing that in the third quarter of last year, US dollar-denominated credit to emerging markets fell for the first time since the global financial crisis. The drop comes as closer scrutiny is now being paid to borrowers, with some being accused of squandering investor money and wasting the opportunity to boost growth.
“The problem is the quality of the assets that were financed by the debt boom,” says Hyun Song Shin, BIS head of research.
“All the weaknesses are suddenly being uncovered,” he says.
The IMF has described Ematum, owned by three state-affiliated entities, as “a source of substantial fiscal risk” for Mozambique. One of the world’s poorest countries, it is suffering a deepening economic malaise. Its currency, the metical, lost a third of its value last year, amid delays in multibillion-dollar gas projects and volatility in emerging markets.
The debt was originally borrowed via a special-purpose vehicle for Ematum, an arrangement that does not require the same level of disclosure as a sovereign bond issue. It began life as a $500m loan that was then sold on to investors by Credit Suisse and BNP Paribas. A further $350m loan was arranged by VTB Capital.
The loans were repackaged and sold to investors as an $850m government-guaranteed, seven-year bond with a coupon of 6.305%. The bonds were sold at a slight discount to face-value, giving investors an attractive effective annual income of 8.5%.
Crucially, the tuna bond’s prospectus makes no mention of security boats.
“The main object of the borrower is the fishery activity of tuna and other fish resources including the fishing, holding, processing, storage, handling, transit, sale, import, and export of such products,” the document issued by VTB Capital reads.
“The borrower may develop other activities which are subsidiary or complementary to its main object, provided these are duly authorised.”
International investors including Danske Bank, AllianceBernstein and Aberdeen Asset Managers are some of the largest holders of the debt, according to Bloomberg data. “We bought the bond as a proxy for Mozambique sovereign debt,” says Greg Saichin, chief investment officer of emerging market debt at Allianz.
“It was supposed to go to the Mozambique national tuna company to buy boats, but sadly, we heard in the aftermath that a good chunk of the money ended up with the Mozambique national coastguard to buy vessels.”
Donors were also enraged by the affair — both with the banks and the government. Maputo has faced questions about why it backed the operation with a loan guarantee that breached its own annual budgetary ceiling on external borrowing by many multiples.
In the view of one foreign official in Maputo, it was the tale of a poor country wanting to buy defence systems that it knew it could not put in its budget. But, the banks also came in for a roasting.
“You can criticise Mozambique for not doing proper planning and so forth, but the banks were charging huge commissions, they were … opaque,” the official says.
“If the authorities had tried to go through a regular route (for the loan), it would have been impossible. Donors would not have accepted it.”
Credit Suisse and VTB Capital, which have been hired by the government to arrange the bond restructuring, declined to comment, as did BNP Paribas.
Mozambique’s finance ministry did not respond to detailed questions, saying the government had already answered in parliament. Adriano Maleiane, the finance minister, previously told parliament he wanted to negotiate a longer repayment period with a lower interest rate.
Under its restructuring plan, Maputo is trying to persuade investors to replace the remaining $697m of existing 2020 Ematum bonds that are amortising, with debt that will mature in 2023 and pay interest.
It has given investors until today to secure an early exchange deal offering a ratio of 1.05 new bonds for every old one exchanged. Do Rosário, one of Ematum’s founders, insists the company can flourish.
He says that of the 150 vessels licensed to fish tuna in Mozambique waters, only one was operating under the country’s flag.
“We see a lot of opportunity and we want to start (it on) an industrial scale … not an artisanal scale with one, two or three boats,” Do Rosário says. “We want to make a presence and we want to export, because we see a lot of potential.”
The company says it is already exporting to China, SA, and Portugal and hopes to have sales of $36m this year.
Victor Borges, the fishing minister, predicted last year that the tuna fleet would have revenues of $200m a year when fully operational. But an EY audit showed that Ematum had accumulated losses of $23m up to December 31 2014.
The IMF, which provided a $286m emergency loan to Mozambique in October, has described the underlying assumptions in a feasibility study on the fishing project as “overly optimistic”.
Credit: Business Day