Ecuador rebuffs legal challenge to restructuring
July 31, 2020
Lawsuit from Contrarian and GMO could curtail any economic recovery from COVID-19, government says
Ecuador responded to a legal challenge to its debt restructuring plans on Thursday, saying a case brought by Contrarian Capital and GMO "has not merit" and seeks to derail a good-faith agreement made with most of its investors.
Contrarian, a distressed debt investment fund based in Connecticut, and GMO, an asset management firm in Boston, sued to block Ecuador's $17.4 billion restructuring plan, alleging that the Ecuadorian government is trying to mislead bondholders and coerce them into accepting a debt exchange, according to press reports.
Ecuador struck a deal earlier this month with a group of bondholders that holds roughly half of the country's sovereign debt. The bondholders, which include AllianceBernstein, Ashmore Group, Ayres Management, BlackRock, BlueBay Asset Management and Wellington Management, agreed to lower the total debt to $15.8 billion, lower average rates to 5.3% from 9.2% and extend average maturities to 12.7 years from 6.1 years.
More bondholders have adhered to the deal since then, representing more than 53% of the outstanding principal amount of Ecuador's bonds and holding more than or close to 50% of the outstanding principal in almost all series of eligible bonds, the government said in a statement.
"The republic therefore disagrees with the contention by Contrarian and GMO, which together hold a small minority of the total outstanding principal amount of the eligible bonds, that the invitation to exchange is 'coercive'," it added.
Last week, however, two groups of bondholders, including Amundi and T. Rowe Price alongside Contrarian and GMO, rejected the proposed bond swap and stuck by a counteroffer from July 16.
After a hearing on Thursday, Ecuador agreed to delay the deadline for bondholders to decide on the restructuring to August 3 from July 31. But it pointed out that the lawsuit from Contrarian and GMO causes complications for an already difficult situation as the country reels from one of the worst outbreaks of COVID-19 in Latin America and an abrupt drop in oil prices, leaving it with "significant financing gaps for the near future."
According to estimates from the International Monetary Fund (IMF), Ecuador's economy is expected to shrink 11% in 2020.
"Such legal action could further delay the economic recovery from an unprecedented economic and health crisis," the government said of the lawsuit. "If allowed to proceed, such a legal action would threaten to harm the republic and its citizens and would create a dangerous and damaging precedent for other emerging markets sovereigns."