BLK BlackRock Inc

By Matt Wirz, Matina Stevis and Julie Wernau 

Investors are preparing to fight Mozambique's plan to restructure their $726 million of bonds a second time, threatening a stalemate that could delay the country's access to much-needed aid.

Bondholders are forming a committee to prepare for a potential default and say they won't negotiate debt relief now because they mistrust the government's financial disclosures and want it to seek relief from other creditors first, according to people familiar with the matter.

Investors are particularly angry that Mozambique has proposed restructuring their bonds alongside $1.2 billion of bank loans that were undisclosed until The Wall Street Journal reported their existence in April. By that time, most bondholders had already voted to accept the first restructuring, which converted bonds they had bought from a state-owned company into sovereign government debt but delayed repayment for three years.

"The bottom line is bondholders are exasperated," said Charles Blitzer, a former assistant director of the International Monetary Fund's monetary and capital markets department who consults for some Mozambique bondholders.

Mozambique issued the so-called tuna bonds in 2013, purportedly to build a fishing fleet. Investors later learned that the proceeds had been redirected to the military.

The country's financial situation worsened after news of the hidden loans prompted the IMF to suspend aid this spring and to demand an internationally supervised audit of the previously undisclosed deals. Bondholders, the IMF and opposition lawmakers in Mozambique are trying to determine whether the loans were contracted legally and how the borrowed money was spent.

A standoff with investors could worsen the southern African nation's sharply declining economic growth and double-digit inflation.

"We are trying to convey a sense of urgency because we think it's in everyone's interest to find a quick solution," says Ian Clark, a lawyer at White & Case LLP who represents Mozambique in the restructuring talks. "The payment capacity is virtually nil."

The bonds and loans were arranged by Credit Suisse Group AG and Russian lender VTB Group. Credit Suisse declined to comment on the loans. A spokeswoman for VTB said: "Mozambique confirmed to us that they were following the necessary internal and external legislation and that comprehensive information on the loans was disclosed to creditors and investors."

The bondholders committee is expected to include mutual-fund managers AllianceBernstein Holdings and the London branch of Franklin Templeton Investments and hedge funds Greylock Capital Management and NWI Management, the people familiar with the matter said. Other firms holding the bonds include BlackRock Inc., and Marathon Asset Management.

Mozambique's financial adviser, Lazard, told bondholders on a conference call in late October that the nation needs additional relief by January to re-establish its IMF borrowing program. The next $38 million interest payment on the bonds falls due in January.

Bondholders want Mozambique to restructure its bank loans and bilateral loans owed to foreign governments before restructuring the bonds again, said Mr. Blitzer. The $76 million annual interest expense on the bonds accounts for a relatively small 9% of Mozambique's total debt service costs over the next five years, he said.

Mozambique's repeat restructuring highlights the risk banks and investors took when plowing money into frontier markets during the commodities boom through 2014.

Lee C. Buchheit, a top sovereign-debt lawyer with Cleary Gottlieb Steen & Hamilton LLP, recommended Mozambique repudiate the loans in informal communications with government officials in May, according to emails reviewed by the Journal. Mr. Buchheit argued that the government guarantees backing the loans were illegal and that restructuring the debts would legitimize them.

Mr. Clark, the legal adviser that Mozambique ultimately hired, said the government guarantees in the loans are enforceable under U.K. law.

Mozambique's ruling Frelimo party initially resisted the IMF audit before agreeing in hopes of a resumption of aid. The audit is being managed by the IMF, Mozambique, and Sweden and will focus on how money from the loans and bonds was spent, people familiar with the matter said. Results are expected in the spring, they said.

(END) Dow Jones Newswires

November 07, 2016 17:59 ET (22:59 GMT)

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