Bloomberg News

Bond Monsters Courted by Correa After Default: Andes Credit

February 14, 2013

Ecuadorean President Rafael Correa

Ecuadorean President Rafael Correa, who is poised for re-election Feb. 17, is seeking to take advantage of a record rally in high-yield debt that’s allowed countries from Bolivia to Zambia to sell bonds to finance a 167 percent surge in spending. Photographer: Diego Granja/Bloomberg

Ecuador President Rafael Correa, who dubbed international bondholders “true monsters” when he defaulted on $3.2 billion of debt in 2008, is preparing for a return to overseas credit markets.

The state-run pension fund’s plan to sell at least $200 million of bonds abroad this year is a prelude to Ecuador’s first international sovereign offering since 2005, according to Walter Spurrier, director of Guayaquil-based economic research company Grupo Spurrier. Yields on Ecuador’s $650 million of dollar notes due in 2015, the country’s sole-performing foreign bond, have dropped 0.99 percentage point to 8.08 percent in the past two months. That compares with an average increase of 0.28 percentage point for emerging-market government debt.

Correa, who is poised for re-election Feb. 17, is seeking to take advantage of a record rally in high-yield debt that’s allowed countries from Bolivia to Zambia to sell bonds to finance a 167 percent surge in spending. Ecuador, whose B rating from Standard & Poor’s is five levels below investment grade, would be the least-creditworthy country to sell debt abroad since similarly ranked Lebanon issued $500 million of bonds due in 2023 to yield 6 percent in November.

“The government wants to return to the market, even more after seeing the appetite for risky countries like Bolivia,” Spurrier, whose clients include JPMorgan Chase & Co. and the International Monetary Fund, said in an interview from Guayaquil. By using the pension fund to sell bonds, “it could be that they’re putting their toe in the water to check the temperature,” he said.

‘Coordinated Issue’

Finance Ministry officials and the lending arm of Ecuador’s state-run pension fund, Biess, are in talks with Citigroup Inc. and JPMorgan to sell the debt in international markets, Chief Executive Officer Efrain Vieira said in a Jan. 28 interview.

“This isn’t going to be an independent issue, but a coordinated issue with different branches of government,” Vieira, 48, said. “Biess and the government need to agree on a convenient interest rate because if I set a rate in international markets alone, it could generate unnecessary noise.”

Vieira, who manages $9.53 billion for the country’s retirees, said Biess is seeking a yield of 6.5 percent, lower than the 7 percent to 7.5 percent banks say it can get.

‘Working Hard’

Adrian Garcia-Aranyos, a JPMorgan spokesman, declined to comment. Anthony Ingham, a spokesman at Citigroup, declined to comment in an e-mail.

Finance Minister Patricio Rivera and central bank President Diego Martinez didn’t reply to interview requests made through their press offices to discuss plans to issue bonds. In July, former central bank President Pedro Delgado said Ecuador was “working hard” to return to the credit market.

Bolivia, rated two levels higher at BB-, sold $500 million of bonds due in 2022 to yield 4.875 percent in October. Zambia, ranked one level higher than Ecuador at B+, issued $750 million of notes maturing in 2022 to yield 5.632 percent in September.

Average yields on emerging-market government bonds fell 158 basis points, or 1.58 percentage points, last year and touched a record low of 4.437 percent on Jan. 3, according to JPMorgan. They rose two basis points to 4.79 percent yesterday.

‘Rogue’ Borrower

While Ecuador will have difficulty persuading investors to trust it after defaulting twice in a decade, global demand for higher-yielding assets means the government will probably find buyers willing to take the risk, Carl Ross, a managing director at Oppenheimer & Co., said. Investors will probably demand a yield of at least 10 percent for a 10-year sovereign bond, he said.

“Ecuador is about as rogue a borrower as you really get, but this is the kind of market where maybe even an Ecuador can issue,” Ross said in a telephone interview from Atlanta. “In this market, with the low interest rates that we have, almost anything is possible.”

Correa, the first Ecuadorean president since 1996 not to be thrown out of office before his term ended, is poised to win re- election as voters reward him for using the OPEC nation’s oil wealth to boost spending on social welfare. Polls show the former economics professor will defeat the opposition in the first round with at least 48 percent of votes cast after pledging to “radicalize” his “citizens’ revolution” with free education and health care.

‘Too Early’

The planned offering by state-run pension fund doesn’t necessarily indicate Ecuador will return to the bond market in the next couple of months, according to Ismael Velez, the chief executive officer at Pichincha Casa de Valores SA, the country’s biggest brokerage.

“It’s too early to tell,” Velez said in a telephone interview from Quito. “After the elections, if the government wins, it needs to enter into a process of prioritizing the size and structure of the state. I don’t see an immediate return to market for at least six to nine months.”

The extra yield investors demand to own Ecuadorean government dollar bonds instead of Treasuries was unchanged at 699 basis points at 11:22 a.m. in New York, according to JPMorgan.

Since the default, Ecuador has borrowed about $7.3 billion from China in exchange for future oil exports, tapped the nation’s public pension fund for financing and raised taxes on companies including oil producers and banks to finance the budget.

‘Best Possibility’

Correa plans to use a $2 billion loan from China this year to help finance a budget gap that will swell to a record $6 billion, or 7.75 percent of gross domestic product, leaving a $4 billion funding gap, according to the Finance Ministry and the central bank. That’s up from last year’s forecast budget deficit of 5.7 percent.

The state pension fund is the Andean country’s “best possibility” to issue foreign debt because workers’ monthly pension contributions provide steady cash flows to guarantee payments, Spurrier said.

Correa defaulted on Ecuador’s 2012 and 2030 global bonds, saying the securities were “illegitimate” and “illegal.”

“I know a lot of people who will say, ‘out of principle, I don’t care what price, I will never buy an Ecuador bond,’” Oppenheimer’s Ross said. “But I also know a lot of people who are more pragmatic about the whole thing and, at a price, they will buy it.”

----With assistance from Veronica Navarro Espinosa in New York. Editors: Lester Pimentel, Robert Burgess

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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