Ecuador: Consent solicitation is a prelude to restructuring
Flash Report / Ecuador

Ecuador: Consent solicitation is a prelude to restructuring

  • Ecuador launches consent solicitation to defer interest over 27 March-15 July until August

  • But it is not clear if Ecuador will be in a position to pay by then either

  • Rather, we think Ecuador will hope to have a bond restructuring plan by then, as a prior action to a new IMF programme

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Tellimer Research
9 April 2020
Published byTellimer Research

Ecuador announced a consent solicitation yesterday as it seeks to amend certain terms of its bonds in order to provide short-term payment relief. Specifically, it is seeking approval to defer until August interest payments originally due between 27 March and 15 July. It is also seeking approval to allow a consent solicitation fee, by reducing slightly the first originally scheduled interest payment on or after 27 March (by US$0.5 per US$1,000 of principal), and to remove certain events of default. The deadline for consent solicitation is 5pm NY time on 17 April 2020. 

All its outstanding US$ bonds are eligible in the consent solicitation (Table 1). For each bond, except the 2024s, the amendments will become effective with the support of more than 50% of holders of each bond and more than 66 2/3% of holders in aggregate. For the 2024s, consent is required by more than 75% of holders. 

The consent solicitation seems to go further than we might have expected when Ecuador announced on 23 March that it will suspend certain upcoming bond payments, but this all-encompassing approach may be more efficient than a piecemeal one, bond by bond, as each payment falls due. It stated before that it would suspend interest payments on the 2022, 2025 and 2030 bonds, which were all due in late March; and, using their grace periods, this would take them to end-April (presumably with the intention of giving the authorities time to devise and implement this consent solicitation plan). We think interest due on these three bonds amounted to cUS$220mn. But, given the coupon schedules on all the eligible bonds, we think five other bonds have coupon payments due during the period 27 March-15 July, so that total coupons covered (deferred) will amount to US$651mn. We think coupons on the 2028s and 2029s are unaffected as their next coupons are due after 15 July (although only shortly after; presumably the intention is that the government will have announced some kind of restructuring by then). 

It is not clear if the affected coupons will be paid in August, or what happens next, but we think this suggests Ecuador is heading for a comprehensive bond restructuring. It will be a sizeable amount that is due in August and, if Ecuador is not in a position to pay today, we do not see why it will be in a much better position to pay in four months' time; and any financial support from the IMF or other multilaterals that is agreed in the meantime is unlikely to be aimed at paying the bonds. 

And how will it be paid? Will deferred coupons be paid to holders in one sum, or will a repayment plan have to be agreed? If it is not ready by then, presumably Ecuador could launch another consent solicitation to defer payments again. Rather, we think Ecuador will hope to have a bond restructuring plan agreed by then (if not completed), although that is tall order too. 

The consent solicitation statement suggests to us that Ecuador will hope to have a new IMF programme approved by August, or staff-level agreement on one, and we think a bond restructuring is now very likely to be a programme condition, probably as a prior action. 

What that restructuring might look like is however unclear at this stage. Bondholders may argue that a maturity extension, grace period on coupons, and possibly even some reduction in coupons may be appropriate, but will likely resist principal reduction. Which begs the question of whether the consent solicitation will be approved. Holders may think better to agree to it, to ensure a smooth process, rather than force a payment default, but there might be some resistance if this consent solicitation is seen as a bridge to something else. 

Of course, if the consent solicitation is not accepted by the 17 April deadline, that takes us closer to the expiry of the grace periods (27 April is the first one), which does not give much time for modifications. Ecuador might then be faced with a hard choice: paying (the three bonds' overdue coupons) in order to buy more time, or defaulting. 

Table 1: Eligible bonds 

Principal
Annual interest
Interest to be deferred
Coupon

US$mn
US$mn
US$mn
payment date
10.750% Notes due March 28, 20222378.9255.7127.928-Mar
8.750% Notes due June 2, 20231797.5157.378.602-Jun
7.950% Notes due June 20, 20242000.0159.079.520-Jun
7.875% Notes due March 27, 2025600.047.323.627-Mar
9.650% Notes due December 13, 20262402.9231.9115.913-Jun
9.625% Notes due June 2 20271000.096.348.102-Jun
8.875% Notes due October 23, 20272500.0221.9110.923-Apr
7.875% Notes due January 23, 20283000.0236.3--
10.750% Notes due January 31, 20292125.0228.4--
9.500% Notes due March 27, 20301400.0133.066.527-Mar

19204.21766.9651.1
Source: Tellimer Research, Ecuador Consent Solicitation, Bloomberg