Ecuador seeks consensual agreement for debt relief
April 10, 2020 |
Investors do not like the precedent, prefer a more complete proposal
Ecuador is seeking relief from short-term financial obligations amid rising deaths, as the novel coronavirus, COVID-19, sweeps over the country, causing a major health crisis that is per capita among the worst in the region.
Getting bondholders to agree to the call is the next big step.
On Wednesday, the country announced that it was seeking to amend certain terms and conditions on ten series of bonds maturing between 2022 and 2030. The bonds represent more than $19 billion worth debt outstanding.
The Andean nation is seeking a deferment until August of interest payments due between March 27 and July 15, and a reduction of interest payments by $0.50 for each $1000 principal amount of securities.
On March 24, Ecuador honored a $325 million payment on debt but opted to take a 30-day grace period on coupon payments in an environment where the plunge in the price of oil is expected to leave a gaping hole in the nation’s finances. Now, with the advance of the coronavirus, the country’s other key sources of income - remittances and tourism - are also waning.
“It’s better than having them default,” said one investor in Boston who requested anonymity because their portfolio includes Ecuadorean debt.
The announcement has not come as a surprise to investors. Minister of finance Richard Martinez had expressed in March the country’s intention to seek a consensual agreement with investors.
Reaching that kind of agreement requires that a full 75% of investors agree with the new terms, investors said.
“We are inclined to sign it,” said a second investor in Boston, who also owns some of the struggling nation’s bonds and requested anonymity. “The only reason not to sign is that we don’t want it to be a precedent. We don’t want it to become a commonly used tool used by other countries every time they get into trouble, with the veiled threat that you’re not going to get paid if you don’t agree.”
Ecuador’s 7.875% 2025 issue traded at default levels, with a bid price of 27.25, up 0.125 points on Thursday, according to data provider Refinitiv. The bonds are stabilizing after underperforming the rest of the sovereign market earlier in the week. Further out the yield curve, the 9.5% 2030 issue traded down 1 point to bid 29, according to MarketAxess via Refinitiv.
“A week ago, the market though Ecuador would get through, basically squeak through. But then they get slammed by the coronavirus pandemic and they have a massive health crisis. Headlines of bodies in the streets appear to be true,” said Roger Horn, senior emerging markets strategist at SMBC Nikko Securities in New York said.
Those reports were behind the underperformance of the sovereign’s bonds, Horn said, adding: “Defaulting in the middle of this is not as bad as a month ago.”
Not all investors, however, see a default around the corner. Instead, one Panamanian investor in the country said the terms proposed by Ecuador are incomplete.
“The offer has to be more than a moratorium of interests until August,” the investor said, adding: “Martinez needs to come out with a more concrete, convincing plan if he wants investors to agree.”