CS Credit Suisse Group

By Matt Wirz 

Credit ratings firm Moody's Investors Service cut Mozambique's sovereign debt rating to Caa3, one of the lowest rungs on the junk-debt ratings ladder. The firm said it expects a continuing loan restructuring by state-owned company Mozambique Asset Management, or MAM, will be followed by defaults on other government debt.

Investors believed Mozambique was poised to resolve its debt troubles as recently as March when Credit Suisse Group AG and VTB Group convinced holders of an $850 million bond to extend their repayment schedule. But the government is now contending with a growing scandal over $1.4 billion in previously undisclosed government-guaranteed loans taken out by state-owned companies, including MAM. The Wall Street Journal reported the existence of the loans in April.

Credit Suisse and VTB couldn't be immediately reached for comment.

MAM missed in May a $40 million interest payment on a $535 million loan made in 2014 by VTB, which subsequently sold much of the debt to investors. The government has started restructuring talks that will likely result in losses for loanholders, Moody's said.

The MAM default is an indicator that Mozambique will also default on a $622 million government-guaranteed loan made by Credit Suisse and VTB in 2013 to a state-owned company called ProIndicus to fund military purchases, the ratings firm said. Payments on that loan start falling due in April.

Moody's placed a negative outlook on its new rating, citing the risk that the MAM restructuring could prompt holders of other Mozambican debt, including the bonds, to demand immediate repayment through "cross-acceleration" clauses in their debt documents. The ratings firm also said Mozambique's creditors might litigate over failures in disclosure concerning the loans.

If Mozambique can restructure the MAM loan, it would obtain some debt relief, but the government would still face a cash squeeze because foreign donors have suspended hundreds of millions of dollars in direct budgetary aid to the country, Moody's said. The International Monetary Fund, the U.K and the World Bank, among others, are unlikely to resume aid in the near-term, the firm said in a statement.

Write to Matt Wirz at matthieu.wirz@wsj.com

(END) Dow Jones Newswires

July 08, 2016 19:44 ET (23:44 GMT)

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