OREANDA-NEWS. Fitch Ratings has placed Mozambique's Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B' on Rating Watch Negative (RWN). Fitch has also placed the Short-term IDR of 'B' on RWN. The Country Ceiling has been affirmed at 'B'.

Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that Fitch believes makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch's sovereign rating on Mozambique is 29 April 2016, but Fitch believes that developments in Mozambique warrant such a deviation from the calendar and the rationale for this is laid out below.

KEY RATING DRIVERS
The RWN on Mozambique's IDRs reflects the following key rating drivers and their relative weights:

HIGH
The Mozambican government has announced it will offer a debt exchange to holders of outstanding bonds issued by state-owned Empreca Mocambicana de Atum (EMATUM). The offer, announced on 9 March 2016, seeks to exchange USD697m in outstanding liabilities for a fixed rate sovereign note due 2023. In Fitch's view, the offer could constitute a Distressed Debt Exchange (DDE) under the agency's criteria, which we would consider a default event.

The original USD850m EMATUM amortising bond was issued in 2013, carries a 6.305% coupon and a 2020 maturity date. The funds raised were originally intended for the development of EMATUM's tuna-fishing capabilities, but according to the IMF, USD500m was spent on maritime security equipment instead. The government subsequently incorporated the USD500m into the budget while the remaining USD350m is booked on EMATUM's balance sheet. The government made the bond's initial principal amortisation payment in September 2015 and is scheduled to make an interest payment on 11 March. Importantly, the government has also explicitly guaranteed the entire bond, as reaffirmed in the exchange offer prospectus.

The government has announced that it will provide full information on the new notes' issue price and rate of interest on 17 March 2016. Fitch understands from the exchange offer prospectus that the new bond will be a bullet repayment with a seven-year term, maturing in 2023.

RATING SENSITIVITIES
Fitch will review the final terms of the exchange announced on 17 March to consider whether the exchange constitutes a DDE under the agency's criteria. When considering whether a debt restructuring should be classified as a DDE under Fitch's criteria, both of the following need to apply: a material reduction in terms compared with the original contractual terms (potentially including a reduction in principal/interest and/or extension of maturity date); and the exchange is necessary to avoid a traditional payment default on the guaranteed EMATUM bond.

If Fitch deems the exchange offer to be a DDE, the agency would downgrade Mozambique's Long-term foreign currency IDR to 'C' from 'B', indicating that default is highly likely in the near term. Once the DDE transaction is executed, the IDR would be downgraded to Restricted Default (RD). Shortly after completion of the exchange with the issue of new securities, Mozambique's Long-term foreign currency IDR would be moved out of the 'RD' category and re-rated at a level consistent with the agency's assessment of its post default structure and credit profile.

Conversely, if the terms of the exchange are not judged to constitute a DDE under Fitch's criteria, we could remove the RWN and affirm the rating.

In the event of delays to the announcement or further uncertainty as to the terms of the exchange, Fitch would likely maintain the RWN.

The rating will be formally reviewed on 29 April 2016, in line with Fitch's published calendar.

KEY ASSUMPTIONS
Based on the public statements made by the authorities to date, Fitch assumes that a bond exchange will occur in the near term and that there is a possibility that the offer could constitute a DDE under the agency's criteria.