Credit Swiss and VTB Group’s $622 million loan to Mozambique for naval fleet matures in 2021

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Credit Swiss and VTB Group’s $622 million loan to Mozambique for naval fleet matures in 2021

7:00 CAT | 05 Apr 2016

Tuna fishing in Mozambique and diamond mining in Russia might seem a world apart. Yet, Swiss banks are stepping forward to provide finance where other banks might be running for cover.

The somewhat unexpected link between Maputo and Moscow is a Swiss investment bank. In two articles published within a week by Reuters and the Wall Street Journal, the Credit Suisse Group was mentioned as the bank involved with both the Mozambican and the Russian governments.

Credit Suisse organised a sale of $850 million worth of bonds by state-owned Mozambican company in 2013, to finance a tuna fishing fleet, the WSJ reported. Here, we have the first Russian connection, as the state-controlled VTB Group was a co-leader in the bond sale.

Within months of the bond sale, investors were told that some funds would be spent to buy navy ships, supposedly to protect the fishing fleet from pirates. Last Friday, bond holders had to agree to a bond restructuring, swapping original paper (which was guaranteed by the government) for a longer-dated sovereign bond. A sweetener comes in the form of higher expected return. The new bond yields 14.4% compared to 8.5% for the original tuna fleet bond.

A twist came with a disclosure that Credit Swiss and VTB Group lent the Mozambican government some $622 million around the time when the original tuna bond was issued. The money was for the Mozambican naval fleet. The bank debt matures in 2021, a couple of years before the newly restructured bond is to be repaid. That’s if there is still money in the kitty.

The moral is that there is a reason why someone is prepared to pay over the odds to raise debt, and that dictatorial regimes tend to run out of money more often than not.

This story would probably be just a foot note, a cautionary tale for fixed income investors who are chasing yields in the deep waters off the African cost.

Yet, Credit Suisse has been in the news as one of few Western banks who are interested in organising the privatisation of state assets in Russia, according to Reuters.

UBS and UniCredit are also mentioned as having submitted proposals to participate in the privatisation of government stakes. The banks would get involved if the privatisation does not violate existing trade sanctions.

Others are more circumspect – most US and European banks have forgone an offer to participate.

The Russian state plans to sell shares in the oil producer Bashneft (50.08%), diamond conglomerate Alrosa (10.9%) and the VTB Group (10.9%). The same bank which was involved in the Mozambican bond deal.

The privatisation deals in Russia might be easier on investment banks, compared to the bonds which could occasionally backfire. The banks collect their fees, make sure that all the risks are spelled out in offer circulars and walk away. It is probably hard for Swiss banks to resist such a deal given the lack of competition from other international banks. It could also put the banks in pole position for other deals if and when the sanctions are lifted.

The risk, both for banks themselves (and their shareholders) and their clients, is not just their reputation. It is the very real monetary risk of getting too intimately involved with a regime which, at best, is unpredictable and probably not completely trustworthy.

For those investors who might be temped to participate in Russian privatisations, warning signs must be flashing red. The government is selling Bashneft, which was recently expropriated from its Russian billionaire owner, who had been put under house arrest. Elsewhere, the government is fighting off multi-billion dollar claims from Yukos’ previous owners by saying that the company was illegally privatised by its management in the late 90s.

In its article, Reuters has picked up on an interesting fact. While Switzerland has joined the anti-Russian sanctions, the country has managed to avoid counter-sanctions, which ban imports of much of western food to Russia. Apparently, the only Western cheese in Russian supermarkets now is Swiss cheese.

It might be too far fetched to connect cheese with investment banking, however complex the link between the two might be. Yet, the risks is that Swiss banks’ shareholders and their clients might wake one day to some additional disclosure or extra risks.

Very much like the bond holders in the tuna fleet in Mozambique.

Source: Saxo Group