China Loans Ecuador $1 Billion as Correa Plans First Bond Sale Since 2005

Ecuador received a loan commitment from China last month for at least $1 billion, helping finance a budget deficit that’s projected to reach $4.23 billion this year, central bank President Pedro Delgado said.

The South American country also plans to tap international debt markets this year, Delgado said yesterday in an interview at his offices in Quito, in what would be the first global sale since it defaulted on $3.2 billion of bonds three years ago. The government is seeking yields of no more than 7 percent, he said. The yield on Ecuador’s 9.375 percent bonds maturing in 2015 has fallen 104 basis points, or 1.04 percentage points, to 9.31 percent in the past year as of 4 p.m. New York time, according to JPMorgan Chase & Co.

“At least $1 billion is covered with financing that was obtained from China at the end of the year,” said Delgado, a 49-year-old economist.

Since Ecuador’s default, the government has borrowed about $7.25 billion from China, or 16 percent of the country’s total outstanding debt, according to Fitch Ratings, in exchange for future oil exports, tapped the nation’s public pension fund and raised taxes on companies including oil producers and banks to finance the budget.

Telephone calls to the Chinese embassy in Quito went unanswered.

Bond Sale

Ecuador is in talks with Hamilton, Bermuda-based Lazard Ltd. (LAZ) and Clifford Chance LLP (1000L) to structure the bond sale, Delgado said.

“We are working on this very quickly and our goal is for sometime this year,” Delgado said about the timing of the sale. “Everything depends on the market environment.”

No one at Lazard or Clifford Chance responded to telephone messages seeking comment.

Correa probably needs to offer investors higher yields than similar-maturity Argentine bonds, said Michael Henderson, a London-based economist at Capital Economics Ltd.

“Foreign investors are still pretty wary,” Henderson said yesterday in a telephone interview. “They’ll do well to get 9 percent or better, although much depends on the specifics of the offer.”

Delgado declined to provide more details about the planned debt sale.

Ecuadorean government debt was the third-riskiest after Venezuela and Ukraine as of yesterday among 15 emerging markets tracked by JPMorgan Chase & Co., according to the bank’s EMBI+ indexes.

Repurchase Offer

Ecuador, which bought back 94 percent of its defaulted bonds in 2009, may offer to repurchase the rest of its outstanding debt due in 2012 and 2030, Delgado said. The Andean country wouldn’t pay more than the original offer of 35 cents on the dollar to holders of the securities, he said.

“There’s no reason why we would pay more than what we offered before,” Delgado said. “It would be a very bad signal to those who participated originally.”

President Rafael Correa stopped payments on $3.2 billion in bonds due 2012 and 2030 in December 2008 and March 2009, saying the securities were “illegitimate” and “illegal.” The government’s bonds due in 2015 were the only global notes Correa kept servicing.

Ecuador has no plans to stop payments on securities due in 2015, Delgado said.

“It’s been very clearly established that with the 2015 bonds there was no presumption of wrongfulness,” he said. “These are being paid and they are being paid on time.”

Oil Prices

The biggest threat to Ecuador is a sustained fall in oil prices as the country’s use of the U.S. dollar as its official currency limits monetary-policy tools to spur growth, Henderson said.

“If prices fall back, which they look set to do, obviously the pace of growth that we’ve seen in the past couple of years isn’t going to be sustainable,” Henderson said.

Correa’s administration, which has raised taxes nine times since 2007, changed its oil laws in 2010 to give the government greater control over crude reserves.

The government canceled oil and natural-gas contracts with companies, including Brazil’s Petroleo Brasileiro SA (PETR4) and Houston-based Noble Energy Inc. (NBL) in November 2010 when they refused to sign new contracts allowing the state to take an increased share of profits.

Crude Exports

In the following 12 months, crude exports from Ecuador, the Organization of Petroleum Exporting Countries’ smallest member, tumbled 22 percent to 7.38 million barrels per month as of November, according to the most recent data from the country’s central bank.

This year, the Finance Ministry estimates economic growth will slow to 5.35 percent with oil prices averaging $79.7 per barrel, according to the Finance Ministry’s 2012 budget. Planned maintenance at the Esmeraldas refinery, which will go off line for six months around the end of March, will cut the economy’s expansion as the state spends more on subsidized fuel imports, Delgado said.

The economy slowed in the third quarter to its weakest pace since the first three months of 2010, expanding 1.74 percent compared with 2.33 percent in the second quarter, the central bank said last month. Year-on-year growth in the quarter was little changed at 9 percent, the bank said.

Last year, Ecuador renewed a contract with PetroChina Co. (601857), China’s largest oil producer, for a $1 billion loan in exchange for future crude sales. About half of Ecuador’s crude exports go to China as part of its debt payments with the Asian nation, according to the nation’s state-owned oil company PetroEcuador.

The Finance Ministry said June 27 that it signed an additional $2 billion loan with China Development Bank Corp. to finance public works projects and announced July 1 it will get a $571 million loan from the Export-Import Bank of China to build a hydroelectric plant in the southern Andes.

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

To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net

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