Ecuador strikes a deal with large bondholder group

Ecuador strikes a deal with large bondholder group

Bonds Debt Capital Markets Corporate & Sovereign Strategy Fixed Income Ecuador

Ecuador reached a major milestone on Monday by reaching a debt restructuring agreement with a major portion of its bondholders, finance minister Richard Martinez said in a press conference on Monday, highlighting a cut in its debt payments and an extension of the maturities on its foreign obligations.

"The negotiation process was intense and we have tried at all times to protect the interests of Ecuadorians," Martinez said. "It alleviates the weight of the debt in the years to come so that our country can have more resources for economic reactivation and social programs for the most vulnerable."

A total of $17.4 billion in debt is being renegotiated. The ad-hoc group that reached an agreement with Ecuador is composed of Ashmore Investment Management, AllianceBernstein, Blackrock, Bluebay Asset Management and Wellington Management Co. This group holds almost half the country's notes. 

Martinez said Ecuador achieved better conditions in five areas: alleviation in payment flows, capital reductions, longer maturities, lower interest rates and longer grace periods.

"This year we will not make any additional payments," said Martinez, referring to payments flows. A total of $11 billion dollars that were scheduled to be paid before 2025 have been postponed for later years, he said.

Existing debt capital is being reduced to $15.8 billion from $17.4 billion, said Martinez. 

The interest rate will come down to an average of 5.3% from 9.2%, he said. Currently the highest interest rate is 10.75%, and this will come down to a maximum of 6.9%.

Average maturities have been lengthened 12.7 years on average from 6.1 year on average. This will be done by extending the maturity of some bonds to 2040. Currently the longest maturity is 2030.

Finally, a grace period has been achieved both for capital and interest payments, Martinez said. For the next five years, Ecuador will not make any capital payments. 

"We will have virtually a two-year grace period for interest (payments)," Martinez added, saying that between the rest of this year and next year the country will only pay $79 million, down from $2.9 billion in capital and interest. 

"We have managed to get bondholders to agree to wait until we recover," Martinez said.

Some Ecuadorean sovereign bond prices spiked higher on news of the agreement. The 9.55% 2026 issue rose approximately 5.5 points in price to bid 49.125, its highest level since early March, according to data provider Refinitiv. The 7.850% 2024 bond, however showed no change in price on the day, holding a bid of 49.75, according to Refinitiv.

The vote of the remaining bondholders is still pending. Most bonds will require 60% approval by bondholders, while the 2024 bonds will require the approval of 75% of bondholders. 

The support of the IMF plays an important role in securing the support of the remaining bondholders, Martinez said.

"We are working with the IMF to build a framework for Ecuador's debt that has a more sustainable trajectory," he said. Martinez hopes to reach a staff level agreement with the IMF sometime in July or August. He does not yet know the size of the agreement, which will depend on the final results of the restructuring negotiations and on the results of the bilateral debt negotiations with China.