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Moody's upgrades Mozambique to Caa2 on bond restructuring

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Moody's upgrades Mozambique to Caa2 on bond restructuring

Moody's on Sept. 20 upgraded Mozambique's long-term foreign- and local-currency issuer ratings to Caa2 from Caa3, reflecting expectations that the country's upcoming bond restructuring will slightly improve its financial health and increase the prospect of receiving aid from the International Monetary Fund.

Mozambique will issue a new bond at the end of the month in exchange for its sole existing issue, which is due in 2023 and has been in default since early 2017. Under the new bond, the government will pay nearly $40 million to creditors this year, representing 0.3% of GDP, and interest payments of 5% from 2020 to 2023, compared with the 10.5% coupon carried by the current bond due 2023.

The restructuring is estimated to cut the government's interest bill by about 0.2% of GDP in 2020-2023.

"The restructuring will provide slight financial relief to the government, lower litigation risks and improve the prospects of Mozambique entering an IMF program in the next few years," said Moody's, which assigned a (P)Caa2 foreign-currency senior unsecured debt rating to the upcoming bond on a provisional basis.

Moody's, however, noted that the Caa2 rating signals a "high risk of default for private creditors" on the back of elevated government debt and limited access to funding. It maintained the country's stable outlook.

The agency said it could consider an upgrade if it sees prospects of significant public reforms and sustained fiscal consolidation that would help the government unlock the benefits from its LNG projects. In contrast, it could consider a downgrade if the government misses paying interests or signals plans to restructure the new bond.