Fitch cuts Ecuador credit rating to C; default eyed

Fitch cuts Ecuador credit rating to C; default eyed

Bonds Debt Capital Markets Corporate & Sovereign Strategy Economy & Policy Fixed Income Funds Ecuador Latin America Coronavirus

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Fitch Ratings on Friday cut Ecuador’s long-term foreign currency credit rating to C, a move taken after the government sought a consensual agreement from bondholders for relief from debt payments as it struggles with fighting the coronavirus pandemic and a plunge in oil revenue.

Ecuador, last week, said it was seeking to amend debt payment obligations on ten bonds maturing between 2022 and 2030, representing more than $19 billion in debt outstanding.

“A deferment in payments, if agreed to by bondholders, would constitute a distressed debt exchange (DDE) in Fitch's view. If such agreement is not reached, the risk of a missed debt payment is high,” the firm said in a statement.

Ecuador is currently using a 30-day grace period on two coupon payments, the first of which expires in late April, the firm said.

The devastation of the novel coronavirus, COVID-19, on Ecuador has news reports of the dead laying in the streets as the Andean nation’s health system has been overwhelmed.

Oil revenue, severely curtailed by the plunge in global crude prices, was further hampered by the country declaring a force majeure on its crude exports after a landslide ruptured two of its main oil pipelines. On Saturday, the state-run oil company Petroamazonas said it would cut its output to 65,000 barrels per day, a drop of roughly 85%.

President Lenin Moreno, on Friday, announced the creation of a humanitarian assistance account to be funded by contributions from companies and citizens that exceed certain financial threholds. The effort is meant to redirect cash to support smaller companies and less fortunate citizens.

Ecuador has 7,257 confirmed cases of COVID-19 with 315 deaths, as of April 11, according to the Johns Hopkins Coronavirus Resource Center.

A plunge in the price of oil, the government main source of revenue took a heavy toll on the economy even prior to the COVID-19 crisis.

“The sovereign's liquidity position is exceptionally tight, and social and political pressure for relief from external debt service in order to attend to the domestic crisis has grown considerably,” Fitch said.

The firm also pointed out that the central bank’s international reserves fell below $2 billion at the end of March and cover just 43% of the reserve requirements of financial institutions. This represents the lowest levels in the past two decades of dollarization.

Ecuador’s sovereign debt plumbed default price ranges with the  7.875% 2025 bond was last bid at a price of 27.25 while the 9.5% 2030 issue was bid at a price of 29, according to data provider Refinitiv.

Separate from the flagging economy, an Ecuadorean court convicted former President Rafael Correa on corruption charges, sentencing him in absentia to eight years in prison. Correa, a left-wing politician who held the presidency for 10 years from 2007 through 2017, has denied the charges. He is currently living in Belgium.