The people of Ecuador are rising up to refound their country as a pluri-national homeland for all. This inspiring movement, with Ecuador's indigenous peoples at its heart, is part of the revolution spreading across the Americas, laying the groundwork for a new, fairer, world. Ecuador Rising aims to bring news and analysis of events unfolding in Ecuador to english speakers.

Wednesday, May 27, 2009

Ecuador Buyback Participation Likely High; Future Uncertain

By Claudia Assis and Mercedes Alvaro


NEW YORK (Dow Jones)--Ecuador's clearing price of 35 cents on the dollar for its defaulted global bonds and likely high bondholder participation signal a victory of sorts for the Andean country.

But risk from the way it conducted the repurchase and the price it finagled will likely run far into the future, investors and analysts warn.

Ecuador Tuesday announced a higher clearing price for the Global 2012 and Global 2030 bonds, and set a new deadline for bondholders to resubmit their bids. It had offered a base price of 30 cents on the dollar when it announced the buyback offer, but Tuesday said it would pay a nickel more.

The strategy is to have as few "holdouts" as possible, market participants said. Potential holdouts - investors who don't turn in their bonds and instead want to challenge the default in court - were never able to publicly announce a unified front to fight the default, further strengthening Ecuador's position.

Cost of litigation amid the ongoing credit crisis was an often-cited reason for the lack of bondholder committee. Another key reason an organized front never emerged was that Ecuador is widely believed to have secretly bought between a third and a half of the 2012s and 2030s over the past five months at beaten-down prices in the open market. Government officials have not confirmed or denied the allegations.

The Andean country may have played a good endgame, but it is now virtually shut out of international markets, with lending from regional multilaterals and friendly states such as Venezuela its main remaining creditor options.

"They arguably shot themselves in the foot," said Stuart Culverhouse, chief economist at London's Exotix brokerage. The country's future "in the near term is probably pretty bleak, really," having to contend with its lower oil production, weaker business environment, and an emboldened President Rafael Correa, a self-described socialist who just handily won re-election.

Ecuador will not be able to come back to the market for many years, at least not on "reasonable terms," he added. "The general investor community is furious at what Ecuador has done, I don't think there's any appetite for them for many years, if not for longer."

Ecuador's default is widely viewed as a political decision, as the country spent only a small portion of its revenue servicing its foreign debt.

Finance Minister Maria Elsa Viteri said Tuesday that investor participation on the buyback offer was "excellent," but she declined to be more specific. Viteri also said she doesn't see Ecuador as out of capital markets because it had been "transparent" about its decision to default.

If need arises and for specific projects, Ecuador could ask for help from countries such as China, Canada, Venezuela, Iran and others, the minister added. Viteri also said the country will continue to service its 2015 Global bonds.

The country has indeed shown willingness to continue to service the 2015s, but ability to pay could be another matter down the road, Royal Bank of Scotland debt strategist Siobhan Morden said.

Ecuador's needs for this year are likely taken care of, Morden said, but Ecuador probably tapped out multilateral borrowing for this year. And while other countries would likely cut down on spending, Ecuador has shown no indication of turning thrifty.

Julio Prado, from Quito-based IDE Business School, said it is unlikely that Ecuador will face financial problems in what remains of the year, but its future will depend on whether oil prices continue to drift upward.

Given the country's seizures of private-sector assets in the oil and mining industries and market unfriendly regulatory framework, few believe it will be able to count on investment inflows to keep its external accounts in balance. Internally, the government has limited sources for financing itself.

"In the short term the government won't have financial problems, and if luck continues to help the country with higher oil prices, the government can get easy financing from oil countries such as Venezuela or Iran," Prado said.

If the price falls significantly, however, Ecuador will have serious problems, he warned.

That's because its oil-producing allies will be in similar straits and in no position to lend to Ecuador. Multilateral support will be limited following the tough terms imposed on bondholders, who will be in no hurry to lend Ecuador money anytime soon, several have said. Multilateral money also usually comes with strings attached, being project-specific.

No comments:

Post a Comment