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Currency War Casualty Ecopetrol Shut Out of Market: Andes Credit

February 04, 2013

Currency War Casualty Ecopetrol Shut Out of Market

Ecopetrol is giving into the nation’s demands even as unprecedented global demand for emerging-market debt securities pushed its borrowing costs toward its low of 2.62 percent. Photographer: Paul Smith/Bloomberg

Colombian Finance Minister Mauricio Cardenas’s currency war is depriving state-controlled Ecopetrol SA (EC:US) of the chance to take advantage of a record decline in its borrowing costs.

Chief Executive Officer Javier Gutierrez said on Jan. 30 the oil company won’t need to issue debt abroad in 2013, agreeing to a request by Cardenas to refrain from borrowing dollars to help curb the peso’s appreciation after the local currency rose to a 17-month high last month. Citigroup Inc. and Barclays Plc say the local corporate-bond market, where $5.7 billion of peso notes were issued last year, isn’t big enough as the company seeks to finance a $9.55 billion investment plan.

Ecopetrol is giving into the nation’s demands even as unprecedented global demand for emerging-market debt securities pushed its borrowing costs toward its low of 2.62 percent. Yields on its $1.5 billion of debt due in 2019 sank by 1.64 percentage points last year, more than the 1.36 percentage point drop for developing-nation oil companies.

The size of Ecopetrol’s funding needs makes it “undesirable” for it to rely only on local markets, Alejandro Grisanti, a New York-based analyst at Barclays, said in a telephone interview. “It’s a large plan, and the local market won’t be able to finance it entirely.”

Bond Yields

The Bogota-based oil producer will be able to finance its investment plan locally, Chief Executive Officer Javier Gutierrez said in an interview on Jan. 30.

The company sold inflation-linked local bonds in 2010. It last issued internationally in 2009. The dollar debt yields 2.95 percent, versus 4.25 percent for emerging-market oil and gas companies, according to JPMorgan Chase & Co.’s EMBI Global index.

Cardenas said last week that the government asked Ecopetrol to issue peso bonds or take on bank loans to finance its spending plan. Ecopetrol’s board agreed to avoid overseas borrowing, Cardenas said Feb. 1.

“The company will mainly take on debt in the local currency and won’t pressure the exchange rate in that sense,” Cardenas told reporters in Bogota.

The Finance Ministry declined to comment on Ecopetrol’s debt plans in an e-mailed statement.

The peso rose to 1,750.50 per dollar on Jan. 2, its highest since July 2011. Its 9.7 percent advance last year, driven in part by a record $16.7 billion in foreign direct investment, was the biggest among currencies tracked by Bloomberg, apart from the Polish zloty and Hungarian forint.

Dollar Purchases

Central bank Governor Jose Dario Uribe said Jan. 28 that the monetary authority will buy at least $30 million daily in the foreign-exchange market between February and May, for a total of at least $3 billion during the period. The program would boost average purchases from $500 million per month to no less than $750 million per month. The measures should weaken the peso to its equilibrium level of 1,950 per dollar, Cardenas said Jan. 29. The central bank bought a record $4.8 billion of U.S. currency last year.

Ecopetrol said in December it would invest $4.2 billion on production and $1.7 billion on exploration as it targets output of 798,000 barrels of oil equivalent per day this year. Last year, Colombia asked Ecopetrol to pay part of its dividend to the government in dollars, which it kept offshore to avoid pushing up the peso, and to shareholders in local currency. The government has an 88.5 percent stake in Ecopetrol.

‘Added Incentive’

About 60 percent of Ecopetrol’s revenue comes from exports, with the U.S. being the biggest destination for its crude. Most of its revenue is in U.S. currency, according to Munir Jalil, an economist at Citigroup’s Colombia unit.

The measures being taken by the government work against the best interests of Ecopetrol, Jalil said in a telephone interview from Bogota.

“The rates at which you can borrow in dollars are so low right now, there’s an added incentive,” Jalil said. “Ecopetrol has the bigger part of its income in dollars, so there would be a natural hedge.”

David Cohen, a strategist at brokerage Corredores Asociados SA in Bogota, says slowing inflation and interest-rate cuts have made selling debt in the local market more attractive. Annual inflation slowed to 2.44 percent in December, the lowest rate in more than two years. The central bank reduced its benchmark rate by 25 basis points to 4 percent on Jan. 28, the lowest in the region.

‘Better Conditions’

“There are many incentives” to selling debt in the local market, Cohen said in a telephone interview from Bogota. “There are better conditions for selling in the local market right now with many local issuances tied to inflation. Inflation is falling, so that benefits borrowing in Colombia, in addition to rate cuts by the central bank.”

Corporate peso debt sales totaled 10.2 trillion pesos last year, according to a report on the stock exchange’s website.

Yields on Colombia’s dollar bonds due in July 2021 dropped two basis points, or 0.02 percentage point, to 2.68 percent at 7:48 a.m. in Bogota. The extra yield investors demand to own Colombian government dollar bonds instead of Treasuries was unchanged at 128 basis points, according to JPMorgan.

The cost to protect Colombian debt against non-payment for five years rose one basis point to 98 basis points, data compiled by Bloomberg show. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Daniel Sensel, a New York-based strategist at JPMorgan, says while there’s a “small” chance Ecopetrol will sell bonds overseas this year, an international offering is less likely after the government unveiled its measures to limit peso gains.

There’s a greater chance of Ecopetrol issuing in local currency, “given what the government is saying and their control,” Sensel said in a telephone interview.

To contact the reporters on this story: Christine Jenkins in Bogota at; Oscar Medina in Bogota at

To contact the editors responsible for this story: David Papadopoulos at; Michael Tsang at

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Companies Mentioned

  • EC
    (Ecopetrol SA)
    • $16.56 USD
    • 0.23
    • 1.39%
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