Ecuador’s bond return comes under investor scrutiny
April 30, 2014
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 sovereign’s plans.
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 source.
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 transparent."
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 line.
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." LF