Ecuador Sells $2 Billion in Return to Bond MarketBoris Korby and Christine Jenkins
Ecuador, banished from international capital markets since bailing on obligations in 2008 and 2009, sold $2 billion of bonds today after rebuilding its credibility with investors.
The nation issued the 10-year dollar-denominated securities to yield 7.95 percent, according to data compiled by Bloomberg. Credit Suisse Group AG and Citigroup Inc. managed the offering.
Five years after President Rafael Correa called creditors “true monsters” when he defaulted on $3.2 billion of notes, the self-described socialist returned to the bond market to help plug a budget gap that’s set to swell to a record this year. Asset managers, seeking to boost returns as bond yields plunge worldwide, proved willing to welcome him back.
“The government is obviously seeing it as an opportune time,” David Rees, an emerging-market analyst at Capital Economics Ltd. in London, said in a telephone interview. The yield “is pretty low especially compared to somewhere like Argentina. If they’d come to the market a couple of years ago when there was less risk appetite, they would have paid a double-digit interest rate quite easily.”
Ecuador’s sale comes a day after the U.S. Supreme Court decided against hearing Argentina’s appeal over an order requiring it to pay holders of defaulted notes from 2001 in full when making payments on its restructured debt. The country’s $95 billion default was a record at the time.
Standard & Poor’s lowered Argentina’s rating today to CCC-from CCC+, with a negative outlook. Ecuador’s offering is expected to be rated B, or four levels higher.
A month ago, hedge fund Greylock Capital Management LLC said Ecuador agreed to buy back about 80 percent of remaining defaulted debt from 2008 and 2009 to help pave the way for its bond sale.
Retiring the securities would help protect a new bond sale from any possible legal wrangling stemming from the default, according to Moody’s Investors Service.
“Willingness to pay is one of the key risk factors to consider with Ecuador,” Peter Lannigan, managing director at broker-dealer CRT Capital Group LLC, said in a note to clients today recommending the new bonds. “The country remains in default on some instruments, but has selectively chosen to pay others. As a result, many investors have strong opinions on Ecuador and have no interest in the country’s debt.”
Tumbling borrowing costs worldwide are prompting investors to look further afield to boost returns. Kenya debuted in the offshore market yesterday with a $2 billion offering. The extra yield demanded to own speculative-grade emerging-market sovereign debt instead of U.S. Treasuries fell to 4.49 percentage points earlier this month, the narrowest gap in more than a year.
Correa is stepping up his search for alternative financing sources after borrowing more than $11 billion from China since the country’s 2008 default.
Ecuador, one of only eight countries to adopt the U.S. dollar as its official currency, obtained a $400 million loan from Goldman Sachs Group Inc. earlier this month by pledging part of its gold reserves as collateral.
The 51-year-old former economics professor halted payments on $3.2 billion of debt that he deemed illegitimate five years ago after a commission he formed said the debt showed “serious signs of illegality.”
He kept making payments on $650 million of bonds due 2015. Those securities fell 0.29 cent today to 106.23 cents on the dollar as of 4:08 p.m. in New York, pushing the yield up to 4.98 percent.