Mozambique Rating Downgrade by S&P, Moody’s on Debt Swap

MAPUTO, Mozambique, Capital Markets in Africa — Mozambique’s credit rating was downgraded by Standard & Poor’s and Moody’s Investors Service because a proposed restructuring of about $700 million of bonds issued by a state-owned Tuna-fishing company could be equivalent to a default, according to the firms.

S&P’s rating for the south-east African nation was lowered to CC, 10 levels below investment grade, from B-, the company said in a press statement released on Tuesday. While Moody’s downgraded Mozambique’s issuer rating to B3 from B2, maintaining the rating on review for downgrade, according to statement.

“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,” S&P said. “Once the exchange is completed successfully, we would expect to revise the rating.”

Moody’s stated that, the key driver for the rating downgrade is Mozambique’s deteriorating balance of payments position and reduced capacity for the government to service its outstanding debt, as evidenced by declining foreign exchange reserves of the Bank of Mozambique and the government’s decision to initiate a debt exchange offer to reduce the drain on foreign exchange reserves in coming years.

Moody’s further heighted that the EMATUM notes exchange proposal, announced on 9 March 2016, will likely constitute a distressed exchange according to Moody’s definition. Moody’s will also assess the potential severity of the pressures on Mozambique’s balance of payments and the reserve position of the Bank of Mozambique in the absence of a permanent liquidity backstop.

Moody’s also lowered the rating of EMATUM itself three levels to Caa2 from B2, saying the offer will probably “constitute a distressed exchange leading to an economic loss relative to the original promise under the terms of the existing notes.”

Fitch Ratings Ltd., which ranks Mozambique one step above Moody’s at B, said on March 11 that the restructuring offer may be classified as a distressed exchange, which “we would consider a default event.”