Jump in Oil Prices Makes Lending Ecuador $750 Million a Bit More Appealing

  • B-rated credit said to sell 10-year bonds to yield 9.65%
  • New issue comes two days after Pemex raised $5.5 billion

Oil’s bounce past $50 a barrel is giving life to some beaten-up borrowers.

Ecuador, OPEC’s smallest member, sold $750 million of 10-year bonds to yield 9.65 percent, two days after Mexico’s state oil company saw more than $30 billion of bids for the $5.5 billion of notes it was selling. The demand shows investors warming up to the credits as oil recovers amid producer pledges to curb output.

Ecuador’s junk credit grade puts it on par with countries such as Uganda and Pakistan, and the cash-strapped nation defaulted on most of its foreign debt in 2008 and 2009. At the end of October, Fitch Ratings warned that an increase in its debt load amid already large deficits could further undermine its creditworthiness.

Patrick Esteruelas, the head of research at Emso Asset Management in New York, says that the country’s high-yielding bonds still carry some appeal given the relatively low chance of an imminent default.

“People are still willing to play this credit because Ecuador, for all intents and purposes, is an oil-levered credit," said Esteruelas, whose firm oversees $3.3 billion of assets.

Other reasons to like Ecuador, according to Esteruelas:
* Debt-to-GDP ratio <40%, far lower than that of more distressed, single B-rated credits
* Annual debt servicing payments are low
* General elections in February could end the existing populist regime

Ecuador lowered the yield it offered on the new bonds after initially marketing them to yield about 10 percent, according to a person familiar with the matter who asked not to be identified because the information is private. It was the third emerging-market borrower to sell dollar bonds since the U.S. presidential election.

Petroleos Mexicanos’s bond sale on Tuesday included 10-year bonds to yield 6.625 percent.
The Organization of Petroleum Exporting Countries agreed last week to trim its output for the first time in eight years, seeking to stem a supply glut and buoy prices. Oil traded in New York has surged 17 percent since mid-November.

— With assistance by Richard Richtmyer

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