Ecuador’s bond return comes under investor scrutiny
Investors are wary about Ecuador's possible return to the international bond market five years after it defaulted on $3.2bn of bonds, saying its success could hinge on the structural details
As Ecuador considers staging a return to international debt
capital markets, several investors have told
LatinFinance they have mixed feelings about the
Ecuador defaulted on its 2012 and 2030 foreign bonds in
late 2008, after President Rafael Correa declared the debt
"illegitimate". The sovereign later agreed with most
bondholders to repay some of the debt. Yet the episode has
effectively barred Ecuador from the international bond market
since, forcing the country to rely on loans from China and
multilateral lenders for financing.
All that could change soon. Ecuador met fixed income
investors this month, and is thought to be planning a five-year
bond of around $700m with a coupon of about 7%.
"It's not a credit that is in a lot of portfolios within the
space, so it does have diversification value. But I imagine [a
deal will be] very much a function of what they are willing to
pay and what the market effectively is going to penalize it for
past behavior," said David Robbins, emerging markets portfolio
manager at TCW.
Credit Suisse and Citi organized a non-deal roadshow in
Europe and the US earlier this month, to gauge interest for a
new bond, and they targeted real money accounts, according to a
President Correa earlier this month said Ecuador was looking
to raise around $700m.
"The size of the issue will be a determinant for some
investors," said Jim Barrineau, Schroders' co-head of EM debt
relative. "Because obviously the more marketable debt that
these guys issue, the more people will begin to start looking
at the debt dynamics of the country that are not incredibly
Picking the right day will also be critical: investors have
recently turned their backs on high-risk issuers, especially at
moments of overall volatility in emerging markets. Yet with US
Treasury rates expected to rise later this year, Ecuador may
face a more expensive borrowing environment further down the
Price will be the defining factor, though. Sources said the
default could dampen Ecuador’s hopes of selling a
five-year bond at a coupon of around 7%.
"Ecuadoreans have a pretty checkered past in terms of their
willingness and ability to pay some of their bond debt…
I imagine that will have to be taken into account in terms of
the pricing of the deal," said Robbins.
However, one investor said default was a risk that could be
taken in the short term: "Default only matters if you're on the
bond," he said. "I'm paid to take risks."