By Paul Kilby
NEW YORK, July 25 (IFR) - Ecuador launched a US$1bn five-year bond on Monday, taking advantage of a strong backdrop for LatAm credits to garner much-needed funding for the year.
With books heard reaching US$2bn earlier in the day, the deal gained traction despite concerns about Ecuador’s worsening economic conditions and the country’s history of defaults.
A rally in EM assets, fueled in part by the buyside’s hunt for yield, set the stage nicely for the troubled Andean country, which has been struggling to source financing this year.
“Many of us have been waiting for them to issue as Ecuador is loath to sign on to an IMF program with conditions,” said Sarah Glendon, head of sovereign research at hedge fund Gramercy.
Sole lead Citigroup squeezed pricing from talk of 11% area to 10.75% area (+/-1/8), but failed to grind lower amid pushback from accounts scared off by Ecuador’s crumbling credit metrics.
The oil exporting country’s debt-to-GDP ratio now stands at 35%, close to the government’s official debt ceiling of 40%, said Glendon.
“If they get close to that, I am fairly confident that authorities will brush the debt limit by the wayside,” she said.
But the final yield of 10.75% was enough to get the deal past the finishing line.
“They are aware they have to be generous,” said Glendon. “They have a constrained liquidity position.”
At 10.75%, the new bond offered a decent pick-up to Ecuador’s existing curve, where the 2020s and 2024s were trading at around 9.9% and 10.25% on Friday.
Those bonds have rallied considerably since mid-February, when yields respectively hit around 22% and 15.88% amid fears that rock-bottom crude prices could lead to another default.
Under similar circumstances in June 2014, Ecuador returned to the international bond markets for the first time since President Rafael Correa selectively defaulted in 2008.
At that time, a grab for yield allowed the country to price the 2024 bond at an extremely attractive level of 7.95%.
“People have been looking at the recent performance of Ecuador, which has been very positive,” a DCM banker away from the deal told IFR.
“Last week was the first week the curve hasn’t been inverted.”
Citigroup had taken government officials on fixed-income investor meetings in April, but held back at a time when funding costs remained prohibitive.
Even now, however, some accounts are unimpressed - even with a double-digit coupon.
“At 11% we don’t think the pricing adequately compensates investors the looming macro-economic risks,” said Sean Newman, a senior portfolio manager at Invesco.
“We estimate a funding shortfall of US$2.4bn, which will probably result in further indebtedness at the central bank - which creates additional risks.”
Some investors are hoping that next year’s presidential election will bring a change of government and more market-friendly economic policies.
“Between 2020 and 2024 there will be significant spikes in bond maturities,” said Glendon.
“So whoever is in office will need to prioritize getting their fiscal house in order to maintain market access and be able to roll over maturities during that period.”
Ratings of B/B are expected on the 144a/Reg S deal. (Reporting by Paul Kilby; Editing by Marc Carnegie)