Ecuador welcomes successful debt restructuring


Ecuador Updates

When the IMF announced last month that it would lend Ecuador $ 6.5 billion to get its economy back on track, the biggest piece of a complex debt restructuring puzzle fell into place. . The loan also capped six months of negotiations with international creditors on several fronts, all of which yielded positive results.

Just as the government faced the coronavirus pandemic and a sharp drop in oil prices, it spoke to bondholders about restructuring $ 17.4 billion in debt; asked the Development Bank of China for a one-year amnesty on principal repayments while seeking new loans from Chinese banks; and renegotiated the terms of bonds issued by the state-owned oil company Petroamazonas.

“Ecuador did it,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities. She hailed the IMF deal as “potentially a game changer” for a country which faced a $ 4 billion funding gap this year and which has historically been a serial defaulter.

The IMF agreement played a decisive role: the agreement with the bondholders depended on it. If the IMF had not agreed to a loan program by the September 1 deadline, the whole restructuring plan could have collapsed.

The last outstanding piece of the puzzle is the new money from China, which is expected to be around $ 2 billion. Finance Minister Richard Martínez said last week he hoped to confirm this in a few weeks. President Lenín Moreno said the money should be in Ecuadorian coffers by the end of the year.

One of the secrets of Ecuador success has been in good faith. In March, just as the coronavirus hit, the state was to pay $ 341 million in capital to bondholders. Pressed by critics to default and use the money to fight the pandemic, the government has honored its obligations. This paved the way for mostly cordial discussions from now on.

Another key factor was the structure of Ecuadorian bonds. They contained collective action clauses (CAC) which allow a qualified majority of bondholders to approve the modifications. The measure is designed to reduce recourse to litigation.

Evan Koster, partner of Hogan Lovells Capital Markets, who advised the government, said it was one of the first major tests of CACs in capital market transactions. “In the case of Ecuador, the existing contractual framework contained these clauses, and I think that was essential to our success,” he said.

The negotiations were not without friction: in July, when the government announced a provisional agreement with creditors, certain investment groups refused to register. For a while, it looked like maybe the government should soften its offer.

Then there was an eleventh hour courtroom drama. Two groups, Contrarian Capital Management and GMO, filed a lawsuit hours before bondholders voted on the deal, arguing the plan was “extremely coercive.” New York judge dismissed case leading the way creditors to approve it.

Even then, the case was not in the bag. Ecuadorians needed an agreement with the IMF. The Fund eventually agreed to lend Ecuador $ 6.5 billion over the next 27 months.

Not everyone is happy with the result. Contrarian and GMO felt pressured into an unfavorable deal and on the eve of the IMF’s announcement, a group of academics wrote to Managing Director Kristalina Georgieva, accusing the Fund of playing “a major role in guiding Ecuador on the way to disastrous fiscal austerity ”. They said the new deal would only exacerbate the country’s difficulties.

For now, however, the Moreno government is celebrating its achievements and some hail the agreement with bondholders as an example to follow.

“There will be other countries that will face these problems,” said a person closely involved in the negotiations. “A combination of having the right legal terms and the right approach – dialogue – has worked in Ecuador and I think it will be used in other countries in the future.”

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