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Ecuador Financial Law May Break Debt Market, Villagomez Says

Ecuadorean President Rafael Correa’s proposed changes to domestic securities rules would cut debt sales by about 20 percent and reduce foreign investment, the executive president of the Quito exchange said.

The government plan to tighten regulations on the sale of bonds guaranteed by companies’ future profits will reduce companies’ access to credit, Monica Villagomez said yesterday in an interview. Fixed-income securities account for about 97 percent of the $5.11 billion traded in Ecuador last year, and local corporate debt yields average about 8 percent, she said.

Ecuador’s government says securities rules need to be rewritten to bolster investors’ confidence and increase trading, as well as ease potential integration with regional bourses. The measure would “break” the corporate debt market by eliminating a segment that accounts for about a quarter of debt sales, Villagomez said.

“This is a problem for us,” Villagomez said at her offices at the Bolsa de Valores de Quito. “It would break the fixed-income market” and “affect companies’ long-term possibilities of financing.”

The proposal will probably be approved by Congress, which is controlled by lawmakers allied with Correa, in July, she said.

Economic Policy Minister Katiuska King said in January the changes seek to create “adequate guarantees” to ensure debt is backed by “real” assets. King and Alvaro Troya, an Economic Policy Ministry adviser who helped draft the bill, didn’t return telephone messages seeking comment.

Securitizing Income

By securitizing income from a business, the borrower typically grants debt investors many of the rights held by shareholders. The instrument is common in Latin America, according to Santiago Cornejo, chief executive officer of Oblicorp Asesores en Obligaciones Corporativas y Mercado de Capitales Cia. Ltda., a Quito-based bond structuring firm. The method has been used by London-based BAA Ltd., the owner of England’s Heathrow and Gatwick airports, in 2008 to refinance 13.3 billion pounds of debt ($21.7 billion).

Ecuadorean companies sold $4.97 billion of debt last year, a 1.9 percent decrease from 2009, according to a March report from the Quito bourse. Companies sold $589 million of corporate debt in the first three months of the year, the report said.

Stock Gains

Villagomez said the regulations may also stem a rally in Ecuador’s stock market. The IRECU-BVG total return index, which tracks shares of the nation’s 11 largest publicly traded companies on the Quito and Guayaquil exchanges, has risen 2.4 percent this year through yesterday, compared with declines in every major market index in Latin America, according to data compiled by Bloomberg.

The Ecuador index climbed 17 percent in the past 12 months, twice that of Mexico’s IPC index, while Brazil’s benchmark Bovespa index fell 6 percent in the same period through yesterday, Bloomberg data show.

Last year, companies including the Ecuadorean unit of Nestle SA (NESN), the world’s biggest food company, and INT Food Services Corp., the operator of restaurant franchises in Ecuador including KFC and Cinnabon, both used debt sales backed by future profits to help finance operations. Nestle in November sold $74 million of the bonds with interest rates between 7.25 percent and 8.75 percent.

Government Outlays

Government spending is boosting growth in South America’s seventh-biggest economy as private companies take advantage of public outlays to increase sales of goods and services to the state, Villagomez said. Government spending has risen 121 percent since 2006, according to a December report by the Fiscal Policy Observatory in Quito.

Three companies may hold initial public offerings this year and the Quito bourse is participating in joint initiatives with the Inter-American Development Bank and the Corp. Andina de Fomento to improve corporate governance and educate executives about the benefits of raising public capital that will increase future share sales, Villagomez said.

A government proposal to transform the Quito and Guayaquil exchanges into for-profit companies from non-profit civil corporations is “very, very positive,” Villagomez said. The Quito bourse will probably hold an IPO next year if congress approves the plan, she said.

“This would put us in a much more competitive field” and “open the door to integrate with other exchanges,” Villagomez said. “It would push the whole market to become more professional.”

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net

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