Category: Corporate & Sovereign Strategy

Ecuador’s debt default and subsequent buyback offer risks setting a dangerous precedent, and holders of the defaulted 2012 and 2030 notes should organize to lock up their bonds, says law firm Bingham McCutchen. The firm is organizing a conference call today at 1200 EST to discuss options, according to a letter it has sent to holders. The options include investors not participating in the recently announced tender offer, and instead opting for a lock-up agreement and the petitioning of regional lenders such as the IDB from lending to Ecuador going forward. “This is defeatable and holders should organize to do so,” Bingham partner Timothy DeSieno tells LatinFinance, noting that the possibility of the sovereign already possessing some of the bonds in the offer makes action all the more important. In the letter, the firm calls the sovereign’s tender at a minimum of 30% of face value “coercive,” and finds that cooperation will only legitimize the course it has taken. Instead, it would prefer a “good faith discussion about a proper process and outcome.” Ecuador announced April 20 a modified Dutch auction set to close May 15, with the results are set to be announced on or around May 26.

Mexican tilemaker Lamosa continues to work on a restructuring of some $900m in debt, though the process may take longer than initially expected, say bankers close to the deal. In March, the company obtained a stay until June 30 to try and resolve debt servicing issues. The process may now take until Q3 to reach full resolution, says a banker close to the talks, who notes he is confident that Lamosa’s lenders are on board with the process, and willing to work out a rescheduling. He adds that the company faces a liquidity crunch rather than a fundamental weakening of its corporate structure, though a downturn in homebuilding has affected revenues. Lamosa’s goal is to extend maturity on its main loans to relieve it of immediate debt service needs. The main syndicated facility in question is a $675m 4.7-year average life dual currency deal launched in December 2007, which, at a leverage ratio of up to 3.5x, paid Libor/TIIE plus 200bp. Leverage was most recently quoted at 6.2x. That loan was lead by Scotia, with BBVA, Banamex, Comerica, HSBC, JPMorgan, Unicredit, Banorte, ING, Merrill, Inbursa, RBS, Santander, and WestLB also having taken tickets at launch. Ontario Teachers Pension Plan also has a $225m 7-year bullet loan to Lamosa that matures in 2014. At launch in December 2007, that paid 400bp-450bp over Libor. The bullet may need less restructuring given final maturity is still a ways off, says a banker involved in the deal.

Ecuador could pay holders of its defaulted 2012 and 2030 bonds more than the 30-cent floor price in its buyback tender, its finance minister says. “Ecuador has the resources to buy back the 2012 and 2030 bonds and meet a price slightly higher than the minimum,” finance minister Maria Elsa Viteri says, speaking in a 1-way call with investors Tuesday. She adds that such a payment would put great stain on resources, and that the government could have opted for a cheaper means to resolve the issue of the 2 bond series, which a special committee last year deemed illegal. The minister responded to claims that there is no economic justification for the restructuring by saying Ecuador faces significant challenges in the near term stemming from falling oil prices and decreasing remittances. Viteri acknowledges that a group of 2012 holders have accelerated payments, and adds that the republic reserves the right to transfer repurchased bonds to a voting holder – as a means to deal with aggressive holdouts – but has no plans to do so. The price to be established at auction is based on face value only, she says, and payments will not include past due interest. The government is offering 30% of face value for the defaulted 2012s and 2030s in a modified Dutch auction set to close May 15, with results due May 26. Lazard is advising Ecuador. “It is reasonable to assume that the clearing price could be slightly higher than the 30 minimum price with the market prices of 31.5-32.5 an efficient barometer,” says Siobhan Morden, LatAm debt strategist at RBS. “Whether or not the clearing price comes out slightly higher will depend on the participation threshold and whether authorities can maximize participation,” she adds. She notes that the final price could be weighed down by the 1/3-1/2 of the bonds already retired likely being tendered in at the minimum. “There should be high participation from real money investors,” Morden says, as the tender offers an opportunity to exit with a cash

Argentina’s gas regulator has extended by 90 days its intervention in the running of Transportadora de Gas del Norte. TGN defaulted on a $22m debt payment in December and is in the process of restructuring $347m in bonds with Barclays as advisor. The government initially appointed a state comptroller in December to help manage TGN for 90 days, amid concern a TGN bankruptcy could disrupt gas service. It has now doubled that period. Under a restructuring launched April 23 and running through June 5, bondholders may exchange two existing series of 2012 bonds for new bonds or up to $30m in cash. There is $141m in series A and $204m in series B notes outstanding, plus $2.4m due to suppliers. TGN is offering new 2021 notes initially paying 2% and stepping up to 6%, or a cash payment of $0.25 per $1.

An Argentine default is unlikely, though if it does happen the sovereign would still face easier eventual reacceptance from lenders than Ecuador, say investors and analysts. Speaking on an EMTA panel in New York last week, Gunter Heiland, who helps manage $10bn in EM for JPMorgan Asset Management explains that Argentina has enough cash to make it through the near term. He and others on the panel note that Argentine past defaults were due to a true inability to pay. Ecuador’s recent defaults, simply based on unwillingness, should exclude them from access to funds for a long time. “They [Ecuador] need us a lot more than we need them,” says Mike Gagliardi, senior portfolio manager at HSBC Halbis, noting that he does not anticipate an Argentine default any time soon. Gagliardi also notes that he likes the trade of shorting US Treasuries and buying any Argentine debt available at around 10 cents on the dollar. The 2 countries must hope a recovery comes before political unrest. Meanwhile, Nicolas Eyzaguirre, Western hemisphere head for the IMF, says the 2 countries and Venezuela will have to see whether a lack of access to international funds or a recovery in commodity prices happens first. “It will be a close call, and some won’t make it,” he adds.

Mexican Sofoles are struggling to meet short term debt obligations amid domestic credit contraction. Credit y Casa (CyC) has defaulted on MXP328m ($23.8m) in principal payments related to is CREYCA 01809 and 01709 CP, while Metrofinanciera has come dangerously close to doing the same. CyC says in a statement that the credit market crunch has led to a tightening in the short term debt markets that has prevented the company from rolling over its bonds. Responding to the company’s announcement, Moody’s lowered CyC’s local rating to Ca.mx from Baa2.mx, and says the ratings remain on review for downgrade. The agency says CyC has MXP1.6bn in CP due in 2009. Elsewhere, Metrofinanciera appears to have narrowly missed defaulting on two classes of CP – the Metrofi 00109 and 00409 – in the last week of April. Some MXP4.85m in coupon payments came due April 23 and Monex Casa de Bolsa stepped in to pay down interest due to holders of the notes, says Metrofinanciera.

Ecuador has scheduled for Tuesday a 1-way conference call to discuss the recently launched buyback offer for its defaulted 2012 and 2030 bonds, its finance ministry says. The government announced April 20 that it would buy back the bonds in a modified Dutch auction through May 15, setting a floor price of 30% of face value. It expects to announce results May 26, though it reserves the right to prolong the auction process. There is some $3.2bn outstanding in the 2012 and 2030 bonds, though Ecuador is rumored to have been repurchasing via intermediaries since November. Lazard is advising Ecuador. Bondholders have also started to organize, though the intentions of groups organized by Capital Markets Financial Services and law firm Milbank Tweed remain unclear. Tuesday’s call is set for 0930 EST.

US-based oil service company Williams says it will report a non-cash impairment of about $241m in 1Q 2009 because PDVSA has not paid past due bills and probably will not cover them, even though it has issued notices of default to PDVSA. “In the event that PDVSA does not cure the defaults and does not comply with its contractual obligations to purchase the related assets, Williams will pursue all rights available to it under its agreements, including international arbitration,” Williams says. However, Barclays head of LatAm and EMEA corporate credit analyst Juan Cruz says in a research note that PDVSA will eventually liquidate pending balances with suppliers and that it should have no issues covering short-term obligations.

Brazilian meat producer Independencia says it has provided Brazilian courts with the necessary documents to press ahead with its recuperacao judicial, or bankruptcy filing in Brazil. While the company had filed for protection earlier this year, it was not granted the status because it had not provided judges with a full list of creditors and updated financials. The company first filed for bankruptcy on February 27.