Ecuador’s double-digit poser

Panama and Ecuador tapped the international markets in March ahead of an expected rise in US interest rates. However, while Panama’s timing appears shrewd, locking-in a 10 year deal that yielded 3.889%, Ecuador’s expensive, short-dated transaction raised questions about its strategy and financing needs.

Ecuador priced (at par) a 10.5%, $750 million 2020 bond on March 19. On the deal roadshow, sole-led by Citi, the B3/B+/B rated sovereign said it wanted to raise over $1 billion of 10-year debt. It was also hoping to avoid a double-digit yield so its decision to proceed with the sale has prompted investor speculation about the country’s financing needs, despite Ecuadorian officials stating they had no external financing needs until 2016. It was Ecuador’s second deal since it defaulted on its 2008 bond.

The first deal, in June of 2014, saw the sovereign raise $2 billion of 10-year paper that yielded 7.95%. Since then, however, the country’s risk profile has deteriorated in direct relation to the drop in oil prices – which continued to fall by a further 13% during the roadshow, causing the outstanding 2024s to increase in yield from 8.7% to 9.8% in just a couple of weeks.

“We added Ecuador 24s to our top five on January 22 when yields were 10.5%, after they had risen from 7.5% in October/November,” says Stuart Culverhouse, global head of research at Exotix. “The yield fell to 9% in February but has widened out again and is now 10%.” Ecuador has been among the sell-off in bonds from oil-exporting countries but Ecuador has sold off more. The premium does suggest some amount of investor caution.

Ecuador relies heavily on oil revenues for more than 50% of its exports. The government has responded to the fall in oil prices by cutting $1.4 billion from this year’s budget. The decision to print at such high levels has led some investors to question whether the latest deal was done to pay for the principal repayment of a $650 million, 9.375% deal that expires in December, which, if paid, would be the first time the country has repaid an international bond in full.

“We were told that the 2024s [issued last year] would go to finance the principal repayment of the 2015s but the whiff of desperation in this latest deal makes me wonder if they need the dollars for this repayment,” says one EM investor. Ecuador’s need for finance is also reportedly more pressing with capital flows from China – a traditional source of funds for the Latin American country – becoming more restricted.

Culverhouse says 10% usually deters issuers from coming to the market and he notes the irony of the pricing levels of the 2024s. “The coupon on the new issue being comparable to that on the bonds [Ecuadoran president Rafael Correa] defaulted on six years ago, saying their coupon was too high, and now they appear to be saying this level is fair for the credit,” he says.

For the full article visit Euromoney’s website

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