C&B Notes

Something Fishy

This story is an exasperating illustration of a situation when there is a not-quite-so-fine-line between a change in plans and fraud.  The world’s zero interest rate policy has incented many investors not to look carefully before they leap.

Global investors who in 2013 thought they were lending a state-owned company $850 million to buy a tuna fishing fleet learned within months that the funds had been diverted to buy ships for the navy.  Two years later, they were told Mozambique intended to restructure the bonds, because the fishing company’s revenue wasn’t holding up.  Now, they are learning that Credit Suisse Group AG, which led the bond sale with a Russian bank, had made another sizable loan to Mozambique around the same time of the original bond sale.

The end result is that Mozambique is deeper in debt, paying higher interest on the new restructured bonds and weathering a downgrade of its credit rating to “selective default.”  Investors are left with bonds that are likely worth less than they thought before learning about the other loans. And there still isn’t much to show in the way of tuna.

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The bonds were sold by a company called Empresa Mocambicana de Atum, or Ematum, over several months in 2013 ending in September.  A preliminary offering document for the bonds gave a short description of how the proceeds would be used — for “the fishery activity of tuna and other fish resources” — and included no financial projections, according to a copy of the document reviewed by The Wall Street Journal.  Fund managers said they invested in the deal without much knowledge of how the fishing company would operate because they trusted in the government guarantee backing the bonds.  Later in September, however, the contractor to build the tuna boats announced it also would be building expensive military speedboats.  In public budgetary documents, the government said it had decided to split the funds into commercial and noncommercial uses.

Investors who spoke with the finance minister said they were told the country always thought the proceeds could be used for equipment to protect the tuna fleet.  Meanwhile, Ematum was pulling in at most 5% of the tuna it had expected, according to bond investor Marco Ruijer, who reviewed the company’s financial statements.  In June 2015, the government announced plans to restructure the debt.

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What the investors didn’t know is that in 2013, Credit Suisse and VTB had lent $622 million to another state-owned company called Proindicus SA to fund the purchases of navy ships and radar installations to protect against piracy, a person familiar with the loans said.  The following year, the bank approached investors about expanding the loan to as much as $900 million, the person said.  Credit Suisse didn’t tell the tuna bondholders about the loans until March 24, a day after the bulk of them had approved the restructuring in an early vote, people familiar with the matter said.  The disclosure was triggered by a downgrade from S&P on March 15 that tripped a clause making the loans immediately repayable, one of the people said.