Ecuador is coming under pressure to sweeten its $17.4bn debt restructuring after some bondholders balked at the terms of the deal it presented earlier this month.
The country — one of the poorest in Latin America — said in March that it would be unable to repay all its debts as it deals with the fallout of Covid-19 and a collapse in oil prices. Earlier this month, the government announced a provisional agreement to cut and stretch out repayments, with the backing of the holders of around half of its bonds, including heavyweights Ashmore and BlackRock.
But not all bondholders are on board, echoing a tussle between holders of defaulted Argentine debt. This week, two sets of bondholders — one advised by UBS and BroadSpan Capital, and another holding bonds that mature in 2024 — put forward a counterproposal, calling for modifications that they said would garner “the support of a supermajority of bondholders”.
“The Ecuadoreans were very keen to get the good news out there that they have a lot of bondholders that support a deal, but you need [more],” said Mike Conelius, who manages emerging markets bond strategy at T Rowe Price and is a member of the UBS group. “They started celebrating before the ball was in the net.”
Ecuador’s original plan involves bondholders accepting a 9 per cent reduction in capital repayments, saving Ecuador over $1.5bn. It would also give the country partial debt relief on $10bn over the next four years and a further $6bn after that as it tries to sort out its finances.
The groups opposed to that agreement, which together hold between 25-35 per cent of the bonds — enough to block any deal — made a counter-offer that ties repayment cuts to Ecuador reaching a new lending agreement with the IMF. Average interest payments would be 5.8 per cent, compared to 5.3 per cent in the original plan. The government has not responded publicly to the counterproposal.
Mr Conelius, who is also a member of a separate Argentina-focused group involving BlackRock and Ashmore, said Ecuador must avoid repeating Argentina’s “mistakes” in its talks with creditors. “You shouldn’t be making the same mistake as the people right in front of you,” he said, likening it to “two people tripping over the same curb”.
Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, said the emergence of a minority creditor group with a counter-offer had made things “much more complicated”, particularly as they are demanding environmental, social, and governance criteria be taken into account in the issuance of a new long-term bond. This is “getting off track from a typical restructuring”, she said.
“The two sides are now far apart only weeks ahead of the mid-August deadline” to reach a definitive deal, she said.
Mr Conelius said the ongoing negotiations were still “constructive” and that he was confident both sides could move forward.
Ecuador has strived to keep international investors on side as it deals with its debt problems. In March it paid bondholders $341m when many critics at home argued it should default and use the money to tackle coronavirus instead.
While negotiating with bondholders it is also trying to secure a new lending deal with the IMF, restructure its debt to China and agree new lending from Chinese banks.