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Capital Markets Weekly: Kazakh successful Euro debut, Mozambique progressing restructuring

09 November 2018 Brian Lawson

Kazakhstan's successful debut issue in Euros stood out this week given limited supply of new deals during the US mid-term elections. A second major highlight was the announcement that Mozambique reportedly has agreed a debt restructuring deal with major creditors. Both events are risk positive although Kazakhstan had no urgent need for funding, and Mozambique's financial condition remains heavily sensitive to future success in bringing its gas projects into production.

Kazakhstan successfully completed its Euro-denominated bond debut. On 5 November it launched EUR525 million tranches of five and ten-year with initial price guidance of 1.875-2% and 2.625-2.75% respectively. The issue was priced below these levels at 1.55% and 2.375%, respectively. Kazakhstan's Minister of Finance Alikhan Smailov claimed that initial demand covered the issue four times over, while Russian news agency RIA Novosti suggested that final demand exceeded €3.3 billion. The issue was Kazakhstan's first since 2015: its prior international deals were dollar-denominated. Turkey is planning to follow it with a Euro sale in the near future.

IHS Markit economists assess that Kazakhstan has no urgent need for funding, suggesting it raised its Euro-denominated issuance ahead of potential market deterioration as the ECB moves to end its asset purchase programme and subsequently to normalise its interest rate policies. They note that Kazakhstan is increasing the share of foreign currency public-sector liabilities from a low base, and that these represent just 6.5% of the country's total external liabilities as of end-Q3 2018.

Mozambique reportedly has reached a debt restructuring deal with four key creditors of its defaulted Ematum-related bond issue, according to Reuters reports on 7 November. Under the deal, it would issue a new USD900 million 5.875% 2033 bond to replace its outstanding defaulted USD726.5 million 10.5% 2023 issue, with the deal size calibrated to cover principal repayments and some USD180 million of unpaid interest. The new deal would amortize principal starting in 2029. Through a separate instrument, bondholders would receive up to USD500 million of future fiscal receipts from the Area 1 and Area 4 natural gas projects.

The four cited funds hold 60% of its defaulted issue. This suggests that bondholder approval is likely as the defaulted, previously-restructured Ematum deal has a 75% collective action clause. With support from that proportion of bondholders, the agreed terms automatically would will apply to remaining bondholders, removing scope for "holdout" legal claims, such as those faced by Argentina. The deal also will require formal parliamentary approval in Mozambique.

Key compromises appear to have been made by both sides. The borrower has ceded to demands that in return for extending tenor and reducing bond coupons, bondholders should obtain some benefits from Mozambique's future natural gas production. Mozambique previously had resisted this key concession. Investors face far lower coupons and an extended term.

The deal has been strongly welcomed in the market, with the outstanding 10.5% 2023 issue rising by nine percentage points in price to 92% of nominal value. This implies that investors now attribute only a modest haircut to new package after including their share of fiscal receipts from key gas facilities. Overall, a deal would represent a significant step in resolving Mozambique's debt default, but not a comprehensive one. In particular, the country still has to address the liabilities of two key state-owned enterprises: a USD535 million loan to Mozambique Asset Management and a USD622 million facility for Proindicus remain un-restructured. Mozambique's debt sustainability is likely to improve considerably once it starts production of natural gas, but delays to such projects remain a key downside risk.

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Posted 09 November 2018 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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