Ecuador May Buy Back 90% of Defaulted Debt, RBS Says

By Lester Pimentel

May 15 (Bloomberg) -- Ecuador may buy back as much as 90 percent of its $3.2 billion of defaulted debt as bondholders tender their securities rather than sue for bigger payouts after watching Argentina fend off creditor lawsuits, RBS Securities Inc. said.

Today is the deadline for holders of the country’s defaulted debt to submit bids to participate in the government’s buyback auction. Finance Minister Maria Elsa Viteri proposed repaying as little as 30 cents on the dollar when she unveiled the auction plans on April 20. Bondholders are submitting bids in an effort to get the government to increase the price. Auction results may be announced on May 26.

“Argentina doesn’t set a positive precedent,” said Siobhan Morden, a Latin America debt strategist at RBS in Greenwich, Connecticut. “For many investors, this is an opportunity to exit Ecuador risk at a recovery value above 30. Litigation is a huge time and financial commitment.”

Creditors holding $20 billion of the bonds Argentina defaulted on in 2001 rejected that government’s restructuring offer of about 30 cents on the dollar, the harshest since at least World War II, according to Arturo Porzecanski, an international finance professor at American University in Washington. The holdouts have yet to succeed in winning payment in court as the government has managed to shield its overseas assets from the lawsuits.

‘Tough Time’

“Being a holdout has not been particularly profitable,” said David Bessey, who holds defaulted Ecuador bonds as manager of more than $7 billion of emerging-market debt for Prudential Financial Inc. in Newark, New Jersey. “There are not assets that are easily attachable offshore. It’s been pretty hard. Bondholders have had a tough time finding anything to attach.”

Bessey declined to comment on whether he will participate in the auction.

Ecuador President Rafael Correa, a 46-year-old economist who earned his PhD at the University of Illinois at Urbana- Champaign, halted payments on $510 million of bonds due in 2012 in December and $2.7 billion of bonds maturing in 2030 in March, calling the debt “illegitimate” and “illegal.”

The 2012 bonds trade at 30.5 cents on the dollar while the 2030 bonds trade at 31 cents, according to JPMorgan Chase & Co. The securities were sold in the 2000 restructuring of the country’s 1999 default.

Ecuador’s Holdings

The South American country already owns as much as 50 percent of the 2012 and 2030 bonds, according to estimates by RBS and Barclays Plc. Finance Minister Viteri on May 12 didn’t rule out that the government may have bought back bonds as their price tumbled in the run-up to the default.

“Ecuador has the right to purchase or acquire bonds in any manner always, obviously, in accordance with applicable laws,” she said in a statement. “Any required announcement will be made at the appropriate time.”

Holders of Ecuador’s 2012 bonds may receive a payment near 40 cents on the dollar while owners of the 2030s may get as much as 38 cents, said Alejandro Grisanti, an analyst at Barclays in New York. The price for the 2012 securities will be higher because he estimates the government has bought back a smaller percentage of those bonds in the secondary market.

Holders of 25 percent of Ecuador’s 2012 notes have demanded they be paid back in full immediately, Viteri said in a conference call May 5.

Ecuador, which has been hit by a decline in oil exports, has continued to make interest payments on its 9.375 percent bonds due in 2015. The government views that bond’s legality differently than that of its 2012 and 2030 notes, Viteri said in January.

“It’s clearly not good news that they pay on some debt and not others,” Prudential’s Bessey said. “You assume if you are buying a bond that you stand equally with other bondholders.”