Ecuador’s Banished Pariah Posture
Five years after a voluntary $3 billion default, Ecuador sold $2 billion in 10-year debt at an almost 8 percent yield on a $5 billion order book mainly from the Americas, seven times the originally contemplated placement. President Correa hailed the response on the heels of consecutive ratings upgrades due to high oil prices and an estimated $10 billion in Chinese loans in the past five years, along with an associated buyback of the remaining repudiated paper leaving around $100 million in outstanding bonds. In an indication of the need for normal commercial return gold representing one-fifth of reserves in the dollarized economy was reportedly swapped for liquid assets to cover public spending as legislators cited mounting arrears. The road show crossed the US and investor participation was driven by EMBI index inclusion and scarcity value even before the attractive pricing, according to the underwriters, and the proceeds could be used for refinancing $650 million in the honored 2015 instruments especially if a new Chinese oil refinery deal falls through. The watershed transaction coincided with EPFR fund flow numbers nearing positive allocation for the year as all asset class segments were re-embraced. The trade association EMTA’s Q1 survey captured the comeback as volume rose one-fifth from the previous quarter with local-currency taking over 60 percent of the total. The external portion was about evenly divided between corporate and sovereign and Mexico, Brazil and Russia were the most frequently traded countries. Argentina saw an increase in advance of the Supreme Court decisions on the New York judge’s pari-passu interpretation and litigating funds’ extraterritorial discovery efforts, and both issues were determined in the holdouts’ favor in mid-June with a looming $900 million interest payment due from the existing swap. Ratings agencies immediately assigned default-range CCC marks on the rulings, both on procedural and substantive grounds. The government has threatened to redirect relationships to local law jurisdiction to circumvent seizure and the over $1 billion awarded to the two lead distressed creditors could become $15 billion if other non-participants in the previous exchanges demand equal compensation, over half of Argentina’s foreign reserves. CDS quotes are at 2000 basis points in the thin market, as securities gyrated on speculation of direct negotiations for a compromise which upholds both the judicial outcome and the “lock law” at home barring better than 2005 terms until next year.
Just prior to those events, Venezuela’s state oil monopoly went ahead with a $5 billion issue to domestic banks that will be available to US 144A investors in the secondary market, as almost $40 billion has been offered since 2007 both as a dollar valve and for company business and social commitment. With the large Cuban presence and President Maduro’s refusal to agree to opposition dialogue while the police quash demonstrations, US lawmakers have proposed sanctions bills to scant initial support especially in districts where Citgo stations owned by PDVSA can be isolated.
