17 March 2015

Monsters of Bond Market Now Correa Go-To as China Is Not Enough

By Nathan Gill
(Bloomberg) -- When President Rafael Correa defaulted on most of Ecuador’s overseas debt in 2008, he disparaged bondholders as “true monsters.”

Now, he’s increasingly dependent on their goodwill.

Ecuador hired Citigroup Inc. to arrange meetings with investors to gauge demand for what would be the nation’s second international bond sale in the past year, according to the Finance Ministry.
After relying predominantly on China for foreign funding in the years following the default, Correa is turning more often to bond markets as the collapse in oil prices pushes the Andean nation’s financing needs to a record $10.5 billion this year. The plan comes after Correa, a self-described socialist, cut government spending for the first time since he took office in 2007, helping to win over investors and drive down Ecuador’s borrowing costs by the most in Latin America.

“The composition of their financing is still worrisome, so to the degree that they can move to more transparent forms of financing, that’s also market positive,” Bryan Carter, who helps manage about $360 million of emerging-market debt at Acadian Asset Management, said by telephone from Boston. “In Ecuador’s favor, the market has a relatively short memory.”

Ecuador will look to sell dollar-denominated bonds with a maturity of less than 10 years after the investor talks if market conditions allow, said two people with knowledge of the plans, who asked not to be identified because the information is private.

Loan Delayed

Finance Minister Fausto Herrera is traveling and unable to comment, the ministry’s press office said when asked to comment on the plans to sell debt. The Economic Policy Ministry didn’t respond to telephone or e-mail messages seeking more information on the bond sale.

In a January interview with Bloomberg News, Herrera said this year’s financing needs were completely covered.

“We can finish the year perfectly with the financing we have already signed with China, multilaterals as well as the social security agency,” he said Jan. 13.

On March 5, the Finance Ministry said that a $1.5 billion loan from China expected in February was delayed because of the Asian nation’s New Year festivities. Ecuador now expects to receive the loan this month, the ministry said, without providing more details.

Correa, a 51-year-old former economics professor, said in January that he lined up more than $7.5 billion in financing from China, whose more than $13 billion of loans since 2009 have made the country Ecuador’s biggest foreign creditor.

Borrowing Costs

Yields on Ecuador’s benchmark dollar bonds due in 2024 have dropped 0.34 percentage point this year to 9.88 percent as of 12:26 p.m. in New York. That compares with an average increase in borrowing costs for emerging-market countries of 0.15 percentage point, according to JPMorgan Chase & Co.

“Things have stabilized, and they see that there is a window of opportunity now,” said Santiago Mosquera, vice president of Quito-based brokerage Analytica Securities.

Ecuador, which gets about a quarter of its revenue from oil exports, will have to offer an interest rate of about 8 percent for a bond with a maturity of less than 10 years, Acadian’s Carter said.
The price of the nation’s Oriente and Napo crudes has plunged 58 percent since prices peaked in June.

“I’d rather borrow from the market than from China,” Carter said. “They are clearly overly reliant on China at this point.”