By Matt Wirz and Julie Wernau

The U.S. Securities and Exchange Commission is investigating the sale of $850 million in bonds issued by Mozambique, the latest development in a scandal that is exposing the links between the country, three international banks and a defense contractor.

The move inserts the U.S. into a widening global investigation of Mozambique's debt deals, which involved undisclosed loans and military purchases facilitated by the banks.

In 2013, Credit Suisse Group AG, Russian bank VTB Group and France's BNP Paribas sold the bonds to investors for a Mozambican state-owned company that said it needed money for tuna fishing. But months later, Mozambique's government announced that the funds had also been used to buy military equipment. Bondholders were also unaware that Credit Suisse and VTB made $1.2 billion in undisclosed bank loans to other state-owned companies for additional military purchases until The Wall Street Journal reported on the deals in April.

The SEC last month sent letters to bondholders asking them for documents provided by Credit Suisse, VTB and BNP Paribas during the sale of the bonds, according to a copy of the letter reviewed by the Journal. The letter also requested investors turn over all communications to and from the banks related to the bonds.

The SEC declined to comment.

British and Swiss regulators launched similar probes in the summer. The International Monetary Fund and donor nations in April suspended lending to the country after the Journal reported the existence of the undisclosed bank loans.

Mozambican President Filipe Nyusi recently agreed to an international audit of the deals by investigations firm Kroll, in an effort to regain access to frozen international aid. A report of the audit is expected in February, a person familiar with the matter said.

Mozambique used proceeds from the bonds and loans to purchase military and maritime goods and services from firms owned by holding company Privinvest, such as French defense contractor Constructions Mécaniques de Normandie. Privinvest is owned by Lebanese businessman Iskandar Safa. At the time of the deal, Mozambique's ruling party was in heightened conflict with opposition forces.

About four years after issuing the bonds, Mozambique's coffers are near empty and the country is requesting debt relief from bondholders forthe second time in nine months.

The SEC investigation heightens scrutiny on the back-to-back restructuring attempts and on the accuracy of disclosures Mozambique and its banks made to bond investors and others as the debt deals slowly unraveled.

A committee of bondholders -- including mutual-fund managers AllianceBernstein LP and Franklin Templeton Investments, and hedge funds Greylock Capital Management, NWI Management and Pharo Management -- formed in recent weeks to defend their interests.

The $1.2 billion in additional loans were made by Credit Suisse and VTB to other companies owned by Mozambique's intelligence service to fund other contracts with Mr. Safa's companies. BNP helped sell the bonds but didn't arrange the undisclosed loans with Credit Suisse and VTB, people familiar with the matter said.

Proceeds from at least some of the debt deals went straight from the banks to Mr. Safa's companies, a person familiarwith the matter said. In typical government bond sales, the borrowing country receives the proceeds, then uses them to pay contractors itself. A spokesman for Privinvest, Mr. Safa's holding company, said: "The funds flow and mechanics was agreed by and between the banks and the customer."

Mozambique's economy slumped in 2015 as oil prices fell and in March of this year, Credit Suisse and VTB asked bondholders to agree to let the repayment of the debt be postponed. Most bondholders agreed, but days later, the undisclosed loans became public knowledge, infuriating investors and prompting international donors to halt lending.

After agreeing to the international audit, Mozambique announced to bondholders in late October that it needed to restructure their debt again -- this time including the additional $1.2 billion in bank loans -- but bondholders rebuffed the proposal.

Mozambique's advisers haven't spoken with bondholders for more than a month but have been holding preliminary discussions with Credit Suisse and VTB to lay the groundwork for future negotiations, people familiar with the process said.

The SEC sent bondholders its letter a few weeks after Mozambique proposed the second restructuring.

Write to Matt Wirz at matthieu.wirz@wsj.com and Julie Wernau at Julie.Wernau@wsj.com

(END) Dow Jones Newswires

December 29, 2016 02:47 ET (07:47 GMT)

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