Mozambique: Domestic debt switch leads local currency rating to selective default – S&P

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Mozambique: Domestic debt switch leads local currency rating to selective default – S&P

12:03 CAT | 26 Mar 2025

File potto: Lusa

The financial rating agency Standard & Poor’s has lowered its local currency rating on Mozambique to ‘SD’ (selective default‘.

“Mozambique exchanged Mozambican metical (MZN) 3.7 billion ($54 million) in local currency bonds maturing in March 2025 in return for longer-dated, lower-yielding bonds maturing in March 2030,” writes S&P, pointing out that the “ongoing recourse to such liability management operations, coupled with a history of delayed payments on domestic debt, reflects the sovereign’s constrained fiscal and liquidity positions”.

S&P considers ” this transaction distressed and tantamount to default” and says that it has therefore lowered our local currency rating on Mozambique to ‘SD’ (selective default) from ‘CCC-‘”.

With regard to foreign currency debt repayments on commercial debt obligations, which are usually more important to investors, S&P says it is maintaining the rating, not least because they ‘remain modest’, but warns that “potential delays to gas projects and foreign aid flows, alongside an uncertain external financing outlook, add to the pressures on Mozambique’s finances” .

READ: Mozambique’s local currency rating lowered to ‘SD’ on completed domestic debt switch; foreign currency rating affirmed – S&P

Mozambique “switched the original four-year bonds maturing in March 2025, paying an annual coupon of 16.43%, for new five-year bonds with an interest rate of 14.25%,” according to S&P, which recalls that the government had “previously exchanged MZN5.7 billion ($89 million) four-year bonds maturing in October 2024 for five-year bonds due in October 2029″.

While investor participation in the first exchange was 90%, in this month’s financial operation participation was 71%, says S&P, which adds that ” the government is planning additional debt switches in May and September this year, alongside some in 2026″.

In the note, S&P states that “tute government’s ongoing and planned recourse to debt switches at such low rating levels signals its constrained capacity to manage sizeable upcoming debt maturities amid tight liquidity.”.

“Local currency debt redemptions will rise to MZN38.4 billion (2.4% of GDP) in 2025 and MZN37.1 billion (2.1% of GDP) in 2026, from 1.2% of GDP in 2024, say the S&P analysts.

These “higher local currency debt payments could increase risks of delayed payments or prompt a broader restructuring of domestic debt”, in a context where the ” local financial sector is already highly exposed to the sovereign, with over 20% of total banking system assets in government securities”.

On the other hand, “foreign currency debt repayments will remain reasonably modest until Mozambique’s sole Eurobond starts amortizing from 2028,” .write the S&P analysts.

“Despite tight liquidity conditions, the government continues to service the coupon on its 2031 Eurobond; this stands at 9% ($81 million per year) until 2028 and will decrease thereafter as the outstanding amount of the bond reduces through principal amortization,” they add-

“Amortization will be $225 million annually for 2028-2031 before production at the mega gas projects starts, anticipated in 2030”, says S&P, concluding that “positively, US Exim Bank re-approved a $4.7 billion loan to TotalEnergies SE in March 2025 that had been a key impediment to lifting force majeure on the project”.

Source: Lusa