Bonds News

With coupon funds frozen, Congo heads for Eurobond default

ABIDJAN/LONDON, July 28 (Reuters) - Republic of Congo appeared headed for a sovereign debt default on Monday after the latest coupon payment on its $363 million Eurobond was frozen amid a decades-old legal dispute over a $1 billion debt to a local construction company.

The 30-day grace period for the $21 million payment on the bond maturing in 2029 expires on Sunday. While investors will likely await the outcome of a pending court case before taking action, the central African oil producer risks serious consequences on its future ability to borrow.

The dispute centres around Congo-based construction company Commissions Import Export S.A. (Commisimpex) which has pursued Congo in the courts for nearly two decades to seek payment for work it did for the government going back to at least 1992.

Commisimpex sent two restraining notices to Delaware Trust Company - the trustee of the Eurobond - in late June, freezing the payment to investors of the funds which had been transferred by Congolese authorities a day earlier.

“If they really manage to impose this and then (Congo) owes one billion, then it’s really hard for them to raise funds,” said Jelena Spasojevic, director of emerging markets credit trading at Renaissance Capital.

“(Congo) cannot really afford to pay this. It would have a catastrophic effect ... That’s pretty much all their forex reserves,” she added.

Congo, which has been hammered by falling oil prices, has refused to pay Commisimpex and stated in November the company’s chief Mohsen Hojeij owed 1.3 billion euros ($1.52 billion) in unpaid taxes.

Delaware Trust is seeking to annul the restraining notices, arguing the coupon funds had been transferred for payment to bond holders and no longer belong to Congo.

Attorneys for both sides in the case did not respond to requests for comment.

Contacted by Reuters, the New York court handling the case said it had no information on when a judgment was expected.

Congo has had issues with three of its last four coupon payments on the bond. But Samir Gadio, Head of Africa Strategy at Standard Chartered Bank, said the situation was more nuanced this time.

“There was a willingness from the government side to service the eurobonds on time,” he said. “I would expect some degree of leniency with investors seeking to get more clarity with what happens to the court order.”

Investors could also be encouraged by Congo’s recent talks with the International Monetary Fund (IMF), which recently agreed programmes with CEMAC-zone neighbours Gabon and Cameroon.

“The country has initiated discussions with the IMF towards a funded programme, which could alleviate fears of a continued default because some investors may potentially think that all the legacy debt may be restructured,” Gadio said.

Congo’s Eurobonds are trading at just under 70 cents in the dollar, according to Tradeweb data, after having lost more than 10 cents since the start of July. Earlier in the month, they hit a record low of around 61 cents in the dollar.

Analysts said bond prices were supported by the issue being illiquid. However, the issue trades around 10 cents below the eurobonds of fellow sub-Saharan nation Mozambique , which is already in default.

Credit rating agency S&P Global Ratings, lowered the country’s rating to CCC/C from B-/B earlier in the month, adding its negative outlook reflected the likelihood of the foreign currency ratings being cut to ‘SD’ unless funds paid before the end of the grace period.

$1 = 0.8529 euros Additional reporting by Christian Elion in Brazzaville; Editing by Richard Balmforth