Mozambique court declares govt-guaranteed Eurobond as illegal

Mozambique's top court has ruled that a government-guaranteed $850 million Eurobond issued by state-run tuna-fishing company Ematum in 2013 was illegal, court documents showed.

Mozambique has been battling to restructure its finances after the emergence in 2016 of about $1.4 billion of undisclosed borrowing that prompted the International Monetary Fund and foreign donors to cut financial support, triggering a currency crisis and a sovereign debt default. "The Constitutional Council declares the nullity of the acts inherent to the loan contracted by Ematum SA, and the respective sovereign guarantee granted by the government in 2013, with all legal consequences," the Constitutional Council said in a ruling dated Monday.

It said that "no expenditure can be assumed, ordered or carried out without being duly registered in the budget of the approved state ... which was not the case." Government officials were not immediately available to comment on the ruling. Civil society advocates and creditors were at odds if the ruling would have any impact on the government's current efforts to restructure its debts.

The $850 million Eurobond was dubbed the "tuna bond" as it was supposed to finance a tuna fishing fleet and had been presented to investors as funding for "fishing infrastructure". But much of the cash was later designated for maritime security and reallocated to the defence budget.

In 2016, Mozambican officials agreed to swap the tuna bond's outstanding $697 million for a sovereign Eurobond. But the emergence of hidden lending, including a loan to Mozambique Asset Management (MAM) and a facility for maritime security projects at Proindicus, undermined the relationship between Mozambique and its lenders.

The case was launched by a civil society coalition called Budget Monitoring Forum, which is leading a campaign against the undisclosed loans. The Forum's Denise Namburete said the ruling was "a huge victory".

"The Constitutional Court has the final decision. The government of Mozambique cannot appeal, therefore we are all curious to learn how and what the government of Mozambique will tell the creditors," Namburete said. "It means that as a result and consequently all previous acts associated with this loan and its bonds must be considered illegal and therefore null and void," she said.

"It also means that the agreement of principles drawn up by the Minister of Finance with the creditors should be considered void as well as all the guarantees granted by the government," Namburete added. The Finance Ministry said on Friday it had reached a restructuring deal in principle with holders of the bond issued in 2016.

Reacting to the ruling, Thomas Laryea, legal adviser to the Global Group of Mozambique Bondholders (GGBM) - a group of investors in the 2016 bond - said he did not expect any impact on the restructuring process currently under way. "The Eurobonds constitute new legal obligations from the Mozambique government - a different debtor from Ematum - with substantially different creditors," Laryea told Reuters, adding the bonds had been approved by the country's parliament in line with the constitution and within the limits of the budget law.

"They were issued in public markets, based on legally approved documentation in accordance with English law. Given that the Mozambique court ruling has no legal bearing on the Eurobonds, we expect that the restructuring of the Eurobonds will proceed as agreed." The GGBM is made up of four creditors - Farallon Capital Europe LLP, Greylock Capital Management LLC, Mangart Capital Advisors SA and Pharo Management LLC - who control around 60 percent of the 2023 bond.

The issue indicated around 1 cent lower at 98 cents on the dollar. (Reporting by Manuel Mucari in Maputo and Karin Strohecker in London; writing by Olivia Kumwenda-Mtambo and Karin Strohecker; editing by Edmund Blair and Cynthia Osterman)