FRONT STORY LATIN AMERICA
Ecuador comes with largest bond yet
The Andean nation draws crowd with 10-year note
Referendum next month key test of political climate
ECUADOR came with its largest dollar deal in
years last week when it printed a US$3bn
10-year bond, after generating more than
US$9bn in orders.
Higher oil prices, a changing political
backdrop and investors’ search for yield all
helped buoy interest for the oil exporting
nation despite another year of hefty funding
needs. This marks the eighth time the
country has issued dollar debt over the past
year-and-a-half as it increasingly leans on
THEûINTERNATIONALûCAPITALûMARKETûTOûlLLû
WIDENINGûlSCALûGAPS
%XTERNALûlNANCINGûNEEDSûSTANDûATûAROUNDû
US$9bn this year, according to Fitch, with
analysts expecting the country to tap the
bond market for a little over US$5bn in 2018
- much like it did last year.
Starting at initial price thoughts of low
8%, leads Credit Suisse, Deutsche Bank and JP
Morgan were able to tighten to guidance of
the 8% area before pricing the deal at par to
yield 7.875%.
At that level, the bond came about 30bp
wide to the October 2027s, which were
trading at around 7.56%, with a banker on
the deal putting fair value at around 7.625%
to calculate a new issue premium of 25bp.
That was a satisfactory result for Ecuador.
Not only did it take out a good chunk of its
hefty funding needs this year, but it printed
100bp tighter than when it last came in
October with its 8.875% 2027s.
Even so, bond yields have widened of late
over concerns about political risks amid a
very public battle between President Lenin
Moreno and his predecessor Rafael Correa,
who just last week broke away from the
ruling party to form a new one.
WINDS OF CHANGE?
But some investors are betting that a real
political shift is under way, hoping
Moreno will distance himself from
Correa’s leftist policies and eventually
institute the changes required to right
the economy.
“It has been non-stop issuance but you are
seeing a political move towards the centre
... and oil prices are supportive,” said Ray
:UCARO ûCHIEFûINVESTMENTûOFlCERûATû268û
Asset Management.
Markets have also largely shrugged off
news earlier this month that the
COMPTROLLERSûOFlCEûPLANSûTOûAUDITûDEBTû
issued under the Correa administration.
“This is more an auditing process to
validate debt issues rather than an attempt
to repudiate it,” said Sean Newman, senior
portfolio manager at Invesco.
A key date is February 4, when a
referendum on constitutional reforms will
be held to determine, among other things,
whether Correa can run again for the
presidency.
Hopes are that Moreno, whose approval
ratings are on the rise, will win the
referendum, clearing the way for the
PASSAGEûOFûSTRUCTURALûlXESûFORûTHEûECONOMY
“Ecuador’s spread curve probably will
continue to tighten in the near term,” wrote
a strategist.
“However, it’s long-term outlook still
depends on how Moreno will take advantage
of his political capital to implement
economic policies.”SCEPTICISM
Certainly some scepticism remains over
whether Moreno – who belongs to the
ruling leftist party, will or can carry out the
structural changes required to bring down
THEûlSCALûDElCIT
“We haven’t seen a policy shift [yet],” said
Siobhan Morden, head of Latin America
strategy at Nomura.
“You can’t argue that this is an improving
credit when the administration delivers
HIGHûlSCALûDElCITSûOFûûOFû'$0ûANDûTHEYûAREû
probably targeting something similar this
year.”Indeed, those juicy yields were just too
hard to resist in what remains a tight
market, a situation that arguably gives
Ecuador (B–/B) some breathing space – at
least in the short term.
“Anything that comes with a 7%–8% yield
on a 10-year bond like Ecuador did is going
to generate a lot of interest,” said Petar
Atanasov, a sovereign analyst at EM hedge
FUNDû'RAMERCY
“As long as global macro economic
conditions remain benign, which we
THINKûTHEYûWILLûINTOûTHEûlRSTûHALFûIFûNOTû
longer, a credit like Ecuador will be
able to access the market because of the
yield.”
The sovereign’s choice of yet another new
10-year seemed odd to some, given that it
will now have outstanding 2026s, 2027s and
2028s – a maturity hump that Ecuador will
have to attend to at some point.
“I really believe they could do a 30-year,
and the market would be receptive to it, but
it’s apparently a politically sensitive issue,” a
trader wrote. “They don’t want to pay the
higher rate.”
One banker agreed that Ecuador is trying
to strike a balance between cost and tenor,
but noted that tapping the existing 8.875%
2027 would have created a bond with a
US$5.5bn size.
“They want to keep manageable maturity
sizes,” he said.
Paul KilbyEMERGING MARKETS
China 60 India 64 Indonesia 65 Russia 67 Turkey 68 Kuwait 69 UAE 69
Argentina 70 Brazil 70 Mexico 71“It has been non-stop issuance
but you are seeing a political
move towards the centre ... and
oil prices are supportive”
Source: Thomson Reuters
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7.4- 6
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8.08.28.48.68.89.0%20/10/17 20/11/17 20/12/17YIELD ON ECUADOR’S 8.875% OCT 2027s