NEW YORK, July 29 (IFR) - In a sign that some see as marking the top of a frothy market, Ecuador returned with a US dollar bond this week as the troubled nation took advantage of a strong backdrop to garner much-needed funding.
After sitting on the sidelines since completing roadshows in April, Ecuador finally seized its chance to sell a five-year bond into a risk-on market.
Lower oil prices and the failed coup attempt in Turkey have not slowed the hunt for yield in emerging market assets - much to the benefit of shakier credits seeking hard-currency funding.
Earlier in July, Brazil priced a 30-year bond tighter than the yield it achieved on a 10-year just four months ago, while this week Trinidad & Tobago locked in a 4.5% yield for 10-year money despite the threat of a downgrade to below investment grade.
Investors have stampeded into emerging markets in July, with fund trackers EPFR and Lipper announcing record weekly inflows into the asset class.
“The new inflows coming into the market may explain why Ecuador went well,” said Klaus Spielkamp, head of fixed income sales at Bulltick, a brokerage and asset manager focusing on Latin America.
“I have been receiving calls from clients needing to put money to work and asking what pays. It is a common request.”
Nevertheless, the Ecuador deal may have tested the limits of investors’ tolerance for risk.
Sole lead Citigroup squeezed pricing from talk of the 11% area to the 10.75% area (plus or minus 1/8th), but failed to grind it 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 Sarah Glendon, head of sovereign research at hedge fund Gramercy.
“If they get close to that, I am fairly confident that authorities will brush the debt limit by the wayside,” she said.
Still, the final yield of 10.75% was enough to get the deal past the finishing line and allow the country to grab a hefty US$1bn after amassing a book of around US$2bn.
“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% before the new deal was announced.
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 the country defaulting again.
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 at an extremely attractive level of 7.95%.
“People have been looking at the recent performance of Ecuador bonds, which has been very positive,” a DCM banker away from the deal said.
“[Two weeks ago] 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 - despite the 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.”
On Thursday, the new bonds dipped about a quarter point in the secondary market, quoted at 99.75 after pricing at par as oil prices declined further - but were back around reoffer by Friday.
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 at Gramercy.
“So whoever is in office will need to prioritise getting their fiscal house in order to maintain market access and be able to roll over maturities during that period.” (Reporting by Paul Kilby; Editing by Marc Carnegie and Matthew Davies)