Ecuador’s economy will be the chief victim of its government’s decision to default on $3.8bn in sovereign debt, say analysts. “International banks will starting to close off lines to local banks, independent of how good they may be,” notes Ramiro Crespo, a partner at Quito-based Analytica Securities. “The logical thing to do would be to pay the coupon and then sit down to talk,” he adds. The longer term implications of the debt moratorium will also be substantial. “The default decision coupled with a mix of nationalist, inward-looking, heterodox policies is likely to lead to sub-par economic performance in coming years which significantly increases the risk that dollarization as an FX regime might not survive in the medium term,” according to Goldman. The move is likely to lead to fast and swift action from the ratings agencies, which already have the sovereign rated at CCC. Ecuador’s default marks the region’s second default in only seven years. But since the country has already long been on the fringes of LatAm’s political and economic spectrum, the move is unlikely to spook investors into fleeing the rest of the region’s economies and markets, say sellside analysts. “One concern is that this lowers the bar for defaults,” says RBS debt analyst Siobhan Morden, who notes Ecuador is already using Argentina’s default level as a reference point from which his discussions on renegotiation will depart. Correa said over the weekend he would seek a far larger haircut than what Argentine bondholders took in that country’s debt restructuring.
Category: Daily Brief
Cemex Swap Offer Falls on Deaf Ears
Cemex says it was able to extend maturities on only $72m of its upcoming short term debt. The cement maker offered investors $500m worth of local notes in the exchange, whose purpose it is to swap certificados bursatiles due December 2008, January 2009 and April 2009, for notes that mature in September 2011, explains a Cemex spokesperson. “This shows local investors aren’t willing to stick with the company for the long term,” says one Mexico-based analyst who asked not to be identified. “The company is rolling [over] its debt constantly which may not be cost effective,” he adds. About 75% of the new offering was designed to replace notes due in December and January. The new debt is guaranteed by Cemex and Empresas Tolteca. Cemex expects to pay the remaining $428m it didn’t manage to swap on time, it says. The analyst believes that if Cemex is unable to pay up, it may seek to refinance the amount due. Besides these notes, Cemex has some $3bn in long term debt due in December 2009.
Inflation Down in DR and Guatemala
The Dominican Republic and Guatemala are seeing lower inflation rates, says JPMorgan. The DR’s monthly inflation dropped by 3.3% in November, taking the annual rate to 7.2%, down from 12.8% in October. “We expect positive base effects, lower commodity prices and a decline in domestic demand to ease consumer price pressures and help bring down headline inflation, which is already at its lowest point since October 2007, to around 6% by year-end and keep it between 6-7% in 2009,” the shop says. Guatemala, while not having seen inflation drop in 2008, should see it decline to 7.5% in 2009 from about 9.8% in 2008.
Chile Keeps Rate at 8.25%
Chile’s central bank opted to keep interest rates unchanged 8.25% Thursday. The decision to keep the TPM at its current rate was widely expected by economists. In a statement accompanying the decision, the central bank indicated it would lower rates in 2009, though it will keep an eye on inflation as it does so.
Brazil, Peru to Cut Rates in 2009
Brazil and Peru are expected to start easing rates next year. Credit Suisse believes there is room for a monetary easing cycle in Brazil starting at the next Copom meeting on January 20-21, 2009. Goldman Sachs forecasts six consecutive cuts of 25bp per meeting beginning in January, reducing the Selic to 12.25% by September 2009. The rate should remain unchanged at 12.25% until 2010, says Goldman. On December 10 the rate was kept unchanged at 13.75%. On the same date, Peru also opted to keep rates unchanged at 6.50% for the third straight month. But the country’s central bank should also begin cutting rates in 2009, says analysts. “In our assessment, the [Peruvian] central bank might initiate a monetary easing cycle sometime during the first quarter of 2009, as inflation pressures are starting to alleviate on the back of lower commodity prices and, while still strong, the activity momentum is starting to soften,” says Goldman Sachs.
IDB Funnels Funds into Argentine Wineries
The IDB has approved a $50m loan to Argentina’s government so it can help small-scale grape growers boost income and carry out investment plans. The program will be carried out by the Argentine Agriculture Department and Coviar, a public-private corporation that promotes Argentina’s wine and grape industry. The loan, which was approved on December 10 by the IDB’s board, has a 25 year tenor, with a five-year grace period and an adjustable interest rate. Local counterpart funds for the program total $25m.
Brazil Telecom Clinches BNDES Funds
GVT Holdings, the Brazilian telecom company, has secured BRL616m in funds from the BNDES. The average annual interest rate of the facility is equivalent to approximately 85% of CDI, or 11.37%, says GVT, which says the calculation is based on present day CDI and TJLP levels. The loan has an 8.5 year term and a grace period of 2.5 years for amortization of the principal with interest payments only, and additional 6 years of principal amortization and interest payments. The final payment is due June 2017. Of the total approved amount, BRL200m is to be disbursed by year-end with the remainder being fed to the company through 2011, according to GVT.
Gran Tierra Eyes Argentine, Andean Investments
Oil exploration and production company Gran Tierra Energy says it plans to make capital expenditures of $198m in Colombia, Argentina and Peru in 2009. The company, which has about $140m in cash and no debt, says the investments will be made using cash on hand and cash flow from operations, assuming the price of WTI oil stays above $22 per barrel next year. The company also expects its production to grow to about 20,000 barrels per day in the second half of 2009, up from previous expectations of about 15,000 barrels.
Brazil’s Bonsucesso Downgraded
Moody’s has downgraded Brazilian midcap bank Bonsucesso to Ba3 from Ba2. The move follows the agency’s downgrading of Cruzeiro do Sul on Wednesday. The move is driven by the bank’s lack of access to financing which may drive a further shrinking of the bank’s lending operations and in turn its balance sheet. Mid-sized banks have been among the worst hit financial institutions in LatAm in the wake Lehman Brothers’ collapse in September. The outlook for 2009 for the sector remains grim, say Moody’s analysts.
Peru’s BCP Targets $150m in DPR Bonds
Banco de Credito del Peru is looking to place $150m in notes backed by diversified payment rights (DPR), say people close to the deal. The Series 2008-B bonds, which have received a preliminary A minus rating from Fitch, are being placed by Sumitomo Mitsui. They are a follow up to the bank’s 2008-A series, of which another $150m were issued in July. The bonds will have a floating interest rate and will bring BCP’s total outstanding DPR stock to $1.1bn, according to Fitch. BCP executives declined to comment on the private deal, saying it has not yet closed. The offering is likely to be done through a private placement with banks or vehicles controlled by financial institutions, speculates one structured finance specialist who is not involved in the deal. While MT-100, or DPR sales tend to be private, illiquid deals, they have accounted for a substantial portion of the total bond issuance done in LatAm this year. The structure is reserved for high quality issuers and proceeds can be used for general corporate purposes. In Brazil alone this year, the total issuance of DPR notes has topped $2bn, according to one DPR expert’s calculations.