The Ecuadorian government reached an agreement in principle during July with a major group of private bondholders, which included BlueBay. The deal stood out EM landscape, here’s why…
In our view, three factors differentiate Ecuador’s current restructuring compared to past experiences:
- Speed – within a couple of months of facing challenges, the government reached an agreement in principle with the majority of bondholders following a negotiation period of fewer than two weeks. Historic restructurings have taken considerably longer than this.
- Goodwill – both the Ecuadorian government and the bondholders were determined to find a friendly solution to the liquidity challenges that the country is facing. Notable was the role of the ex-Finance Minister of Mexico, who was advising the Ecuadorian government and adopted a very friendly stance, which aided a quick resolution.
- Liquidity – when comparing this restructuring to others across the emerging markets (EM) corporate and sovereign universe, Ecuador, in our opinion, provides a good example of a liquidity-driven debt reprofiling. An important parameter for sovereign bonds that do not leave the indices and have large debt levels outstanding is to ensure liquidity is not impaired during the restructuring process.
We feel that Ecuador has set an important precedent for the EM sovereign debt universe, particularly as a number of countries, including Lebanon, Argentina and Zambia to name a few, are currently in the process of reprofiling their debt.
We hope that countries such as Argentina, which still have not managed to reach an agreement with bondholders, will take Ecuador’s example on board. Issuing a unilateral proposal without productive bondholder engagement is a risky strategy and we hope a lot more countries begin to follow Ecuador’s lead.
We believe the most important factor in reaching a successful restructuring is to ensure it is conducted at high recovery values over a short timeframe.
In our view, the Ecuadorian example demonstrates that the country has reached above the average recovery level based on the proposed exit yields and has restructured relatively quickly, so we would consider this a successful debt reprofiling.
It’s now up to Ecuador to deliver on its reform agenda in order to drive bond performance from here.