Thu | Aug 13, 2020

Walter Molano | Ecuador debt restructuring proposal

Published:Friday | July 10, 2020 | 12:18 AM

OP-ED CONTRIBUTION: EMERGING MARKET ADVISER

The Ecuadorean 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 two years for coupon payments and five years for the 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. Ecuadorean bonds have CACs – collective action clauses – and most of them require the consent of two-thirds of the bondholders, with the exception of the Ecuador 2024, which requires three-quarters to 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 Inter-American Development Bank, IDB, or the PetroEcuador obligations. The new deal will not have any additional kickers, such as oil warrants.

Ecuadorean 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 28 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-19 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 servicing payments 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 dollarised, and it is killing the economy. The strengthening of the dollar and the collapse of oil prices have 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, which would probably require an expensive recapitalisation. This would sharply reduce the country’s ability to service its debt.

The friendly terms proposed by the government to restructure the debt will give the government some temporary relief and bondholders an ability to minimise their pain, but it may not be the end of the Ecuadorean debt saga.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com