Ecuador credit rating cut to CC by Fitch
March 25, 2020 | Daniel Bases
Ecuador is nearing default of some kind after asking to renegotiate commercial debt, rating agency says
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Fitch Ratings late on Tuesday cut its long-term sovereign foreign currency credit rating for Ecuador to CC from CCC, citing the Andean nation's decision to seek a renegotiation of its commercial liabilities while utilizing a 30-day grace period to pay interest on bond coupons.
Ecuador's oil-led economy is reeling from both the spread of the novel coronavirus, COVID-19, that has spurred a likely global recession , while also suffering from the collapse in oil prices in the wake of a dispute over production between Russia and Saudi Arabia.
"This renegotiation, should it occur, is likely to culminate in a distressed debt exchange (DDE) in Fitch's view," the ratings agency said in a statement.
"Should this renegotiation not occur, there is a risk that the pending coupon payments or future ones could be missed when their grace periods elapse. Both scenarios would constitute default events under Fitch's criteria," the firms said.
On Monday, Ecuador's finance minister, Richard Martinez, said it would tap an emergency loan fund from the International Monetary Fund (IMF) as well as utilize a 30-day grace period to delay interest payments on roughly $200 million in debt coupon payments for its Global 2022, 2025, and 2030 bonds due this month in order to focus on the health crisis unleashed by COVID-19.
At the same time Martinez reiterated what his deputy, Estaban Ferro told LatinFinance on March 16, that the government will still make a $325 million payment on its Global 2020 debt maturing on Tuesday. By making the payment, Ecuador will be able to maintain its access to the international capital markets.
Creditors have largely pushed Ecuador’s sovereign bonds into default territory. The 7.875% 2028 bond bid at 19.375 late on Monday, down 8.5 points from Monday's closing level to show a bid yield of 47.65%, according to data provider Refinitiv.
"In recent days, congressional leaders have called for a temporary suspension of external debt repayment, and possibly permanent debt forgiveness as well, in the context of a health emergency. In view of this pressure, Fitch believes that Ecuador's ability to continue to pay bond coupons may be increasingly difficult to sustain in political and economic terms in the coming months, should a debt renegotiation not be reached," Fitch said.
The IMF is to provide Ecuador with $500 million and that another $500 million would come from the combined efforts of the Inter-American Development Bank, World Bank and the Development Bank of Latin America, also known as CAF.
The IMF said late on Monday that Ecuador intends to seek emergency financing to underpin its efforts to combat the virus and stabilize the economy. Ecuador, which left OPEC in order to increase its output, produces roughly 540,000 barrels of oil per day. The oil price crash has prompted President Lenín Moreno to announce a series of austerity measures to account for oil dropping under the $51 per barrel the national budget is based upon.
In addition to the multilateral lending institutions offering aid, Martinez said it would try to reach consensual debt reorganization agreements with creditors, both commercial and bilateral, within the next several days.
Ecuador has 1049 confirmed cases of COVID-19, with 27 deaths, according to the Johns Hopkins University’s Coronavirus Resource Center. It is second in the region on this grim scale only to Brazil, an economy that is 17 times larger, according to IMF/World Bank data. Brazil has 2,201 confirmed cases with 46 deaths as of Tuesday.