Ematum, a government agency of Mozambique, last week quietly tapped the $500m 6.305% 2020s it sold in September for a further $350m via VTB Capital, a bank not on the original note. Investors said the Russian bank swooped after offering Ematum a permanent EMBI-eligible size and greater distribution into the US, though the tap was anchored by a large London order.
"It's a great opportunity for VTB Capital and an investment in a market that's going to see a lot of growth and a lot more supply," said Andrew Cornthwaite, Head of International Global Banking at VTB Capital in London. "What's striking about this deal is it could have come from anywhere, in that we had a London syndicate desk selling the bonds to international investors. It's an example of exactly how VTB Capital should be using its distribution network."
BNP Paribas and Credit Suisse arranged the original deal on September 5 for the agency, which promotes the country's fishing industry. The deal's underlying loan is explicitly government guaranteed. A fund manager said he was told that Ematum had not been satisfied with the size of the original note or the strength of distribution into the US - even though the bond was issued under Reg S only documentation so could not be marketed to US investors - and that VTB Capital had taken that opportunity to offer to provide the tap. The seven year note amortises from the second year with an average life of 4.5 years. The fund manager said that worries with regards to the size of the original note were because of the amortising structure of the deal. Though the size of the original placement at $500m meant that the bond will be initially eligible for inclusion into the JP Morgan EMBI index, it will drop out after it begins to amortise. A syndicate official on the deal strongly denied that worries about the bond falling out of the index had been widespread at the time of the placement. "There was only one investor who had that concern, but we pointed out that the company had two years to tap the bond to keep the inclusion in the EMBI, or for the investor to trade out of it," said that syndicate official. "It was not a big concern." In response to the allegation that the US distribution of the deal had not been strong enough to satisfy Ematum, the syndicate official said that as the deal was Reg S only it would have been illegal for leads to heavily market to US investors. A second syndicate official added that over 25% of the original note had been sold to US offshore accounts, which is a reasonable proportion for a Reg S only trade. Some of the original deal had already been placed using big boy letters (risk disclaimers), according to leads on the original note. But nonetheless the fund manager said that this is how VTB Capital came to place the tap. "As I understand it, they went to Ematum and offered to show the paper to the investors that they placed the Angola deal with," he said, referring to the $1bn private placement that VTB sold for Angola in August last year. Undecided on attractiveness the tap for Mozambique was priced at 92.051, the same level as the original bond. "They needed more money and we were keen to take more exposure to the company so we were happy to get involved in the tap, as it looks like an attractive level for us," said another fund manager. "The original deal was a repackaged loan from Credit Suisse so it's not that surprising that they went for a private route for the tap as well." That investor said he was given the impression that the deal was sold to "not that many holders". A third fund manager was less impressed with the offering. "We didn't like the credit when we looked at the original deal, and it seems a weird move to tap a deal that's been trading quite weakly compared to the rest of the market," she said.
The existing Ematum trade hit a low of 91.51 on September 11 and a high of 93.04 on September 19. It was trading around 92.5 last week but this week has fallen to around 92. Bankers away from the deal had deemed the original note to have been executed smoothly, though investors had demanded a premium for the loan participation note format used for the bond as a result of it being a repackaged Credit Suisse loan.
Price guidance was originally released at low to mid-8% area, before being refined to 8.5% area and printed in line with that, with a 6.305% coupon. An investor on the trade said the final book size for the original deal was $600m-$700m. Mozambique said it was using the proceeds of the original deal to develop its fishing industry. It is not clear whether the VTB-led tap is also a repackaging of a loan - investors said they understood that this was not the case but VTB declined to comment. VTB eyes more African bonds Many debt bankers have bemoaned the low fees on offer in African deals, but for VTB Capital one of the main draws in getting involved is a foothold in a market where sovereigns, quasi-sovereigns and strong corporate borrowers are expected to tap the bond markets in the years to come. "The Mozambique sovereign is definitely going to bring a deal to market, but there's also a list of sovereigns, and second tier issuers in countries like Nigeria looking to print," said Cornthwaite. He views sub-Saharan Africa as an area where there is everything to play for, and a good chance of winning business. "After the growth we'll see in the next five years the national economies are going to be hugely different," said Cornthwaite. "Right now there's competition for business, but relative to the opportunities on offer the competition is more limited than in other markets." He said that VTB Capital has already been active in Kurdistan and Angola but is aiming to do more in other markets such as Mozambique.