Mozambique foreign currency rating raised to 'CCC+' from 'SD' on completed debt exchange; Outlook ...
S&P Global Ratings raised Mozambique’s sovereign credit rating to ‘CCC+’ from ‘SD’ on Friday 22 November, and assigned the country a ‘stable outlook’, citing as key drivers the completion on October 30 of Mozambique’s distressed debt exchange, whereby the government exchanged its US$726 million notes due in 2023 with US $900 million due in 2031.
“The Mozambican government has completed a distressed debt exchange. Following the completion, we are raising our foreign currency long- and short-term ratings on Mozambique to ‘CCC+/C’ from ‘SD’ (selective default) and affirming the local currency ratings on the country at ‘B-/B’.,” a note released by the financial rating agency reads.
“The stable outlook balances our view of the risks associated with large twin deficits against the improving economic growth prospects over the next 12 months, supported by large investments in extractive sectors,” it added.
S&P is the third of the three major rating agencies to remove Mozambique from this category of sovereign credit quality analysis, which in practice prevented the country from accessing international financing, given the risk perceived by foreign investors.
“This upgrade reflects the completion on Oct. 30, 2019, of Mozambique’s distressed debt exchange,” following the agreement reached with creditors, whereby Mozambique exchanges the US$726.5 million notes for US$900 million new notes and agrees to pay a higher but deferred interest rate over time.
“Under our criteria, we view a default under a distressed exchange as cured upon the completion of an exchange offer, even if nonparticipating creditor debt remains unpaid,” S&P argues, noting: “We set the sovereign rating as our forward-looking assessment of the probability that the sovereign will pay its debt in full and on time.”
Despite completing this sovereign debt resolution process issued in 2016, ” the Mozambique government still faces a high debt burden exceeding 100% of GDP and yet to be resolved litigations on debt owed by two non-financial public enterprises,” says S&P, referring to loans worth almost US$1.5 billion taken out by Mozambique Asset Management and ProIndicus and provided by banks VTB and Credit Suisse, whose resolution is currently being considered by London courts.
“If the courts were to rule in favor of the Mozambican government, we would see no further risks arising from those obligations. However, if the courts were to decide against Mozambique, the loans could become direct obligations of the government, likely requiring further debt restructuring,” the analysts write, noting, however, that: “Nevertheless, we did not rate or assess the validity and timeliness of the guarantees on the loans to Proindicus and MAM. We are therefore unable to opine on whether these constitute financial obligations of the guarantor under our criteria, and consequently whether the guarantor’s failure to honor a payment under the guarantees would constitute a default on its financial obligations.”
The CCC + rating on debt issued in foreign currency “reflects our forward looking opinion on Mozambique’s creditworthiness, following the recent debt restructuring,” S&P says, notwithstanding that “Mozambique is currently still vulnerable and dependent upon favorable business, financial, and economic conditions to meet its financial commitments”.
For analysts, “while its financial commitments appear to be ultimately unsustainable, we think that Mozambique might not face a credit or payment crisis within the next 12 months.”
The CCC + rating, one of the lowest on the S&P rating scale, indicates that a country “continues to be constrained by low per capita GDP, weak governance and institutions, large twin deficits and a high debt burden.”Source: Lusa
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