Ecuador planning to return to international bond market, but 2008 default casts a shadow on any new offerings

Jun 10, 2014

Ecuador is preparing to return to the bond market for the first time since the country defaulted in 2008, taking advantage of robust demand for emerging-market debt in a low-yielding world.
 
The country, whose debt is rated Caa1 by Moody's Investors Service and B by both Standard & Poor's and Fitch Ratings, is due to meet investors in London, Boston, Los Angeles and New York, via a three-day roadshow hosted by Credit Suisse, Switzerland that begins Tuesday, the bank said. Banks typically end up playing a role in these deals after arranging roadshows.

A U.S. dollar-denominated bond is expected to follow, the bankers said, but no indication of the sale's timing has been given.

A bond offer likely would provide a test of investors' appetite for risk, just 5 1/2 years after the country defaulted on $3.2 billion in foreign debt that it argued was illegal and illegitimate.

Other emerging-market countries, such as Turkey, Hungary and Mexico, have tapped the market in recent months, showing that a robust investor base for more mainstream emerging-market debt is in place. Emerging-market borrowers raised more than $100 billion of debt in the first quarter of 2014, according to Thomson Reuters' data, despite geopolitical tensions capping activity in some places, especially in parts of Eastern Europe.

Not all investors, however, are rushing to take part in an Ecuador deal.
 
"Ecuador's past record of defaults makes us very wary, and I don't think taking part in the deal would be high on our radar," said Colm McDonagh, head of emerging-market fixed-income at money manager Insight Investment in London, which manages £295 billion ($496 billion) of assets.

"There is a price for different types of risk, and there will always be demand for a deal such as this. But as far as we are concerned, Ecuador's track record of honoring its debt obligations makes it hard for us to determine the appropriate yield level where we would be comfortable holding those bonds," he said.

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The possibility of the country tapping global investors for funding already was flagged in April. Then, the country's president said in a television interview that about $700 million in U.S. dollar bonds could be issued this year. Ecuadorean officials have spoken at various times over the past three years about a possible debt issue.

One year after Ecuador's debt default, in 2008, it bought back about 93% of the $3.2 billion in defaulted debt at 35 cents on the dollar. That left an estimated $95.37 million of defaulted bonds that would have matured in 2012, with $194.4 million falling due in 2030. Previously, the country had defaulted on its debt in 1999.

Ecuador has $650 million of bonds due in 2015, which the government continues to service. Proceeds from a possible U.S. dollar bond after this week's roadshow will probably go toward refinancing this debt, people involved with the deal said.

Credit: The Wall Street Journal, http://online.wsj.com

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