Lehman Tips Ecuador Switch

Lehman is advising investors to sell Ecuador sovereign 2015s and buy the 2030s, adding that default risk is still quite low. “In the short run, the calendar should limit the space for attempting any restructuring of bonds, while further ahead, the logic of paying is overwhelming, and we think that President Correa will remain pragmatic about the external debt,” says Lehman. “Due to cross default language in bond covenants, any potential problem with either 2012s or 2030s will very likely negatively affect the 2015s. Even more certainly, the 2030s have virtually no chance of being called in the near future,” it adds. According to Lehman, the spread between 2015s and 2030s has widened to about 115bp on a recent stronger bid for 2015s. This is about 2 standard deviations away from the mean, and it may not prove sustainable, says the shop. “It makes sense to sell the 2015s at current levels to capture 115bp of additional spread. Investors can take out about 7-7.5 points making this switch,” says Lehman.