U.K. Regulator Scrutinizes Credit Suisse, VTB Over Mozambique Debt

Inquiry examines whether banks violated regulations governing disclosures to investors around a bond restructuring

U.K. regulators are making inquiries into Credit Suisse Group AG ’s and Russian bank VTB Group’s handling of hundreds of millions of dollars of debt the banks arranged for the purchase of boats and military equipment for state-backed companies in Mozambique, people familiar with the matter said.

Meanwhile, the southern African country has brought in a prominent debt-restructuring specialist to advise on whether it should keep making payments on some related loans, other people familiar with the matter said.

The moves are the latest reactions to deals in a corner of the world that left the country more burdened with debt and feuding with international donors.

The deals with three state-owned companies included $622 million in loans to buy military equipment, $535 million in loans to build a shipyard and $850 million in bondsto buy a tuna-fishing fleet.

Much of the money raised for the tuna fleet was subsequently diverted to the military, Mozambique has said in public budgetary documents. Those bonds nearly defaulted and had to be restructured this year.

The U.K. Financial Conduct Authority is looking into whether the banks violated regulations governing disclosures to investors around the bond restructuring, people familiar with the matter said. While Credit Suisse is a Swiss bank and VTB is Russian, both banks used their U.K. operations to handle these bonds.

Investors have said they weren’t told of the $1.15 billion in loans at the time of the bond restructuring. The FCA is gathering information to see whether the banks failed to make necessary disclosures, the people familiar with the matter said.

Representatives for Credit Suisse and the regulator declined to comment. A spokeswoman for VTB said the bank wasn’t aware of any investigations.

While the banks didn’t specifically call out the loans to bondholders during roadshows to explain the restructuring, they had included the borrowings in the calculation of Mozambique’s consolidated public debt that they provided to investors during the exchange, a person familiar with the offering has said. A Mozambique official also said the loans were included in total debt figures provided in the bond documents.

The Wall Street Journal reported the existence of the loans in April. The International Monetary Fund and donor countries suspended more than $200 million in payments to Mozambique’s government after they came to light, complaining that they hadn’t been disclosed.

On May 23, Mozambique missed a payment due on the $535 million loan and is negotiating with VTB to restructure the debt, the people said. The other loan and the bonds had been arranged by VTB and Credit Suisse.

The government has brought in debt lawyer Lee C. Buchheit of Cleary Gottlieb Steen & Hamilton LLP to advise on that process as well as repayment of the other bonds and loans arranged by the banks, the other people familiar with the matter said.

One of the matters Mozambique is seeking counsel on is whether it could refuse to repay the debts if they were shown to be the product of any malfeasance on the part of the banks, the people said. Spokeswomen for Credit Suisse and VTB declined to comment.

Mr. Buchheit has advised on a number of debt restructurings, including Greece’s. A spokeswoman for Cleary Gottlieb declined to comment.

The government said in April that it needs at least $180 million of aid from international donors to help its population in areas affected by drought and famine, according to the United Nations Office of the Resident Coordinator.

Source: http://www.wsj.com