What negative yields? Defaulted bond has world's top returns

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In a world replete with negative-yielding assets, some investors have made 15% in less than three weeks betting that an African country in default is about to come into a lot of gas money.

This month’s rally in Mozambique’s sole dollar bond comes after the government proposed a restructuring deal at the end of May that should see coupons, which Mozambique stopped paying in early 2017, restarted later this year. For investors who swallowed the diluted terms and bought the bond, vindication has just come in the form of Anadarko Petroleum’s plan to spend at least $20 billion to develop some of the country’s gas reserves.

The yield on the Southern African nation’s bond, due 2023, has fallen almost 5 percentage points since May 30 to 11%, compared with the coupon rate of 10.5%. Total returns on the security beat gains from Cypriot and Spanish counterparts, which were a close second, according to data from Bloomberg Barclays gauges for global debt.

It’s a sweet spot for a country that’s been in the news for all the wrong reasons in recent years over the missed debt payments, $1.4 billion of hidden liabilities, U.S. indictments of its officials and slowing economic growth. It also underscores that investors are prepared to overlook short-term turmoil and wait for an expected surge in government revenues from gas output.

“Investors are hoping that Mozambique will come into a lot of money as gas becomes a huge source of foreign currency,” said John Ashbourne, an emerging-market economist at Capital Economics. “If they can ride out the next couple of years, things should look up.”

Anadarko on Tuesday signed off on what it called the biggest foreign direct investment in Africa, seeing potential for Mozambique to become one of the largest exporters of liquefied natural gas in the world. Gas from the Anadarko-operated offshore field will be sent to a processing plant on land, where it will be liquefied and then shipped abroad from around 2024. That means more tax revenue.

Still, Mozambique would have to rake in other economic benefits from its gas by developing supplier industries and creating jobs to sustain investor optimism.

“Investors will be watching the government’s ability to harness this project for sustainable growth,” said Ashbourne. “If that doesn’t happen, they will be disappointed.”

The government agreed with bond investors last month to restructure the $726.5 million Eurobond, stripping a previous idea from November to give bondholders direct access to future natural-gas revenue. The new plan — which will swap the debt into a new $900 million Eurobond maturing in 2031 and with a coupon stepping up to 9% from 2023 — still proved popular with investors as it gives them a higher interest rate than what was initially proposed. — Additional reporting by Mark Bohlund

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