Category: Ecuador

Ecuador plans to launch an exchange offer to holdouts from its 2008 default, clearing the way for a $400m-$500m new bond issue in the coming year, the country’s deputy finance minister Fausto Herrera tells LatinFinance. “We’re going to do a new offer in the first semester of this year to resolve the holdouts,” Herrera says, adding the terms would be “a little more favorable” than its previous exchange offer in 2009, when it repurchased about $3.2bn in defaulted bonds at 35 cents on the dollar. “President [Rafael] Correa believes we have the financial strength to go to the market with a new offer,” he says. A fresh exchange would “take out” the principal hurdle standing in the way of returning to the international capital markets. It would also dispel any fears that Ecuador could follow Argentina in being taken to court by holdout creditors. Herrera says the holdouts represent a “fairly marginal” sum. It is believed they may represent up to $300m. “We want to diversify our sources of capital,” Herrera says, adding that the sovereign would return to the international bond market “this year or next” depending on the size of the budget deficit. The revelation ends months of speculation over the sovereign’s intention to normalize international financial relations, which broke down following Ecuador’s default. Herrera said a new issue would go ahead if the sovereign received terms similar to what it pays on its loans from China, between 7.0% and 7.5%. Ecuador’s 9.375% $650m 2015 bond has been trading in around the mid 7% range, according to traders. Honduras last week completed its debut international bond sale, paying 7.5% on a $500m 2024 bond. That followed Paraguay’s debut bond in January paying 4.625% for a similar tenor, and Bolivia’s, coming at 4.875% in October. An Ecuadorian delegation, led by finance minister Patricio Rivera will meet ratings agencies in New York this week. The sovereign is rated Caa3/B/B minus.

With President Rafael Correa cruising to reelection as expected this past weekend, attention turns to Ecuador’s potential reengagement with the international bond markets. Analysts and investors see a new bond as a possibility, despite potential obstacles, particularly given Correa’s campaign pledges to increase spending. The recent successful high-yield bond debuts of Bolivia and Paraguay may have helped pave the way. “The market is very forgiving of countries with previous problems and political chaos. If one thinks of Ecuador of the past and to what extent the country could glide to a more prosperous future, the market will consider what they have to say,” Jeremy Brewin, EM debt portfolio manager at Aviva Investors, tells LatinFinance. “Ecuador may continue to flirt with market access. Nonetheless, we continue to believe the yields likely demanded by the market – which has yet to forget the 2009 default – may not be politically palatable to Ecuador,” Ben Ramsey, economist for the Andean region at JPMorgan, tells LatinFinance. Ecuador’s 2015s have traded in the mid-7% range recently. Brewin estimates a new bond from Ecuador should come at least 100bp wide to Paraguay, trading around 4.6% recently. As for the question of need, even with high oil prices, Ecuador’s current account has been barely in surplus or in small deficits. However, Sarah Glendon, analyst at Moody’s, says the government has sufficient financing for 2013.“I don’t see that they need to return to the market right now,” Glendon tells LatinFinance. Though there are not yet specific plans to issue, she notes she would not be surprised if Ecuador tried. Moody’s has Ecuador at a Caa1 rating, based mainly on concern about willingness to pay. In addition to convincing investors of Ecuador’s willingness, there is also the outside chance of a legal obstacle to any new issuance. Though Ecuador’s holdouts from 2009 are fewer and less organized than Argentina’s, there is a chance the ruling of a US court late