Sovereign Analysis / Ecuador

Ecuador: Government announces agreement in principle on bond restructuring

  • The terms result in substantial debt service relief, with a 42% reduction in the average coupon and 9% nominal haircut
  • Despite the agreement, it remains to be seen whether there is broader bondholder support while deal risk remains
  • If concluded by target date, it sends an important message to other sovereigns what goodfaith negotiations can achieve

The government yesterday announced that it had reached an agreement in principle (AIP) with a group of major creditors (the Ad Hoc Group) on restructuring terms for its international bonds (see press release). It follows the consent solicitation that was approved in April to defer until 15 August 2020 interest payments falling due between March-July, thereby providing time and breathing space for negotiations to proceed (see our research here). The restructuring covers 10 bonds, with maturities ranging from 2022-2030, amounting to US$17bn outstanding.

Despite the agreement from the Ad Hoc Group, it remains to be seen whether there is broader bondholder support (especially if other holders have different opinions about debt sustainability and the required amount of cashflow relief), while deal risk remains. That said, if the restructuring is concluded by the mid-August target date, it would mark some kind of record, in our view, for the speed of an agreement in a comprehensive bond restructuring over a reasonably large bond stock. It might also send an important message to other sovereigns in regards to what goodfaith negotiations can achieve, a positive demonstration effect that contrasts with Argentina's approach.

Details

The AIP envisages a consent solicitation to amend existing bonds and an exchange offer for three new bonds. The consent solicitation is expected to be launched shortly, subject to agreement on documentation, and presumably upon building wider support for the proposed offer. As per the prior consent solicitation, approval will require the support of holders of more than 50% of each series and more than two-thirds of the aggregate amount of all series, for all the bonds except the 2024s, which will require the support of more than 75% of holders.

The government expects the proposed terms will result in substantial debt service relief. It results in cashflow savings of over US$16bn over the next ten years (US$10bn over the next four years, and a further US$6bn between 2025-30). The government says it will save US$1.4bn in debt service this year while payments are below US$2bn through to 2030, the year of the first final maturity under the proposed terms. Amortisation begins in 2026. The new terms imply a 42% reduction in the average coupon rate to 5.3%, an increase in the average maturity to 12.7 years and a doubling of the length of the yield curve from 10 to 20 years, and an implied nominal haircut of 9%.

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