Ecuador to Start Bondholder Talks as Economic Strains Mount

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Ecuador is kicking off the first round of creditor talks this week with the goal of releasing an initial debt restructuring offer as early as late June, according to people with direct knowledge of the matter.

President Lenin Moreno’s administration is pressing to avoid a hard default and to regain access to credit markets. The South American nation plans to convene a call with its biggest bondholders, including a group led by BlackRock Inc. and Ashmore Group Plc, on Wednesday as it looks to plug a multibillion dollar financing gap for 2020, said the people, who requested anonymity because the talks are private.

Ecuador is also working to secure a staff-level agreement from the International Monetary Fund and to complete $2.4 billion in loans from China. Half of the Chinese disbursement will come this month, the people said.

Ecuador’s $3 billion of Eurobonds due in 2028 rallied to 39.8 cents on the dollar, the highest in almost three months, as of 1:25 p.m. in New York on Tuesday.

‘Friendly Restructuring’

Despite the nation’s track record of 10 external defaults, second-most in the world since 1800, the Moreno government has won the approval of many on Wall Street. But it’s now grappling with a crash in crude oil prices and one of Latin America’s worst Covid-19 outbreaks. Ecuador was forced to suspend payments on its debt in April. The economic crisis is adding to political pressure ahead of next February’s presidential vote.

On a conference call Friday, Finance Minister Richard Martinez said Ecuador wants a “more friendly restructuring” than Argentina. He pointed to the overwhelming support from bondholders to delay interest payments until mid-August as a reason for optimism. Ecuador liquidated repurchase agreements with Goldman Sachs Group Inc. and Credit Suisse Group AG beforehand to avoid triggering a cross default. The government wants to avoid a situation like Argentina in 2001, when it was cut out of credit markets.

“It took Argentina 15 years to return to the market,” Martinez said. “Ecuador cannot fall into something like this. That would be very traumatic for the country.”

Political Risk

Moreno, who doesn’t intend to seek re-election in February, has seen his approval rating slump to about 20%. Meantime, Martinez has four impeachment motions pending against him, with a fifth in the works. Political opponents have criticized the finance minister for cutting education spending while paying the nation’s maturing March 2020 bond and liquidating the repurchase agreements.

Martinez has argued that the debt-restructuring process and new financing deals couldn’t be accomplished in an orderly fashion without making those tough decisions. He has met privately with at least two presidential candidates viewed more favorably by markets, the businessman Guillermo Lasso and former Guayaquil mayor Jaime Nebot, the people said. Still, the race is wide open. Some investors fear that public discontent will sweep in an outsider and that risk will also weigh on negotiations with the IMF and bondholders.

“The elections are inconvenient,” said Siobhan Morden, head of Latin American fixed income strategy at Amherst Pierpont Securities in New York. “It will probably require a higher exit yield post-restructuring to account for those unresolved risks.”

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