Publish in Perspectives - Wednesday, July 8, 2020
President Lenin Moreno and former president Rafael Correa, who today are enemies. Investors fear Correa's party will return to power. (Photo: Ecuador Govrnment)
Both the government and its creditors want a deal as soon as possible.
BY WALTER T. MOLANO
The Ecuadorian government, led by President Lenin Moreno, announced that it had reached an agreement with its principal bondholders on the terms of the restructuring.
A series of 10 outstanding bonds will be converted into three amortizing bonds, maturing in 2030, 2035 and 2040. The new bonds will have a grace period of 2 years for coupons and 5 years for principal. In return, bondholders will be given an additional five-year zero coupon bond to compensate for interest arrears up to the moment of the restructuring. The deal seems to have been agreed with the largest bondholders, who represent about half of the outstanding stock of bonds. Ecuadorian bonds have CACs, and most of them require the consent of 2/3’s of the bondholders, with the exception of the Ecuador ’24, which requires a ¾’s consent. Bondholders will have until August 15 to participate in the exchange. The restructuring does not apply to the recent housing bond, which was backed by the IDB, or the PetroEcuador obligations. The new deal will not have any additional kickers, such as oil warrants.
Ecuadorian bonds rallied on the news, with prices rising to the mid-50s. There is a strong incentive for both sides to arrive at an agreement as soon as possible. Presidential elections are scheduled for February 28th next year, and there is a growing chance that the opposition, led by the leftist former President Rafael Correa, will win. President Lenin Moreno’s standing in the polls has been plunging, due to the ongoing recession and the devastating COVID pandemic. Therefore, it was little surprise that bondholders were eager to arrive at an agreement with the current market-friendly administration.
Nevertheless, there is no guarantee that the next administration will not impose a harsher restructuring. The current Moreno administration also had an incentive to reach an agreement as soon as possible, thus eliminating the debt service that it would have had to make before the end of the term.
Of course, there is still the nagging issue of the currency. Ecuador remains dollarized, and it is killing the economy. The strengthening of the dollar and the collapse of oil prices has left the country reeling, and it could get much needed relief if it had the capability to devalue. However, that is not an option.
Last of all, a devaluation would be a devastating blow to the banking sector, and it would probably require an expensive recapitalization of the sector. This would sharply reduce the country’s ability to service its debt.
Therefore, the friendly terms proposed by the government to restructure the debt will give the government some temporary relief and bondholders an ability to minimize their pain, but it may not be the end of the Ecuadorian debt saga.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.