U.S. Judge Lets Ecuador $17.4 Billion Debt-Swap Deal Proceed

(Bloomberg) -- A federal judge in New York denied a request by two U.S. investment firms for a temporary restraining order blocking Ecuador’s plan to restructure $17.4 billion in sovereign debt.

Ecuador had argued that a significant delay could lead to a “massive, cascading default” for the South American nation. U.S. District Judge Valerie Caproni in Manhattan on Friday denied the motion by two U.S. investment firms opposed to the debt-swap plan. Boston-based GMO, and Contrarian Capital Management LLC, a Greenwich, Connecticut hedge fund had called its offer to investors of 91 cents on the dollar “coercive in the extreme.”

Caproni disagreed with the funds’ contention that Ecuador lied when it denied, in a press release, that its offer to investors was “coercive.” The judge said, “no one is being compelled or forced to comply with the tender offer.”

Ecuador’s bonds, which lost ground during the hearing, briefly bounced on the news and then lost gains. The 2028 traded at 50.62, down 0.18%.

A restraining order could have pushed Ecuador into default as bondholders had only approved a stay of interest payments through August 15, while it also seeks to reprofile debt with China and to negotiate a new funding agreement with the International Monetary Fund. It also needs to secure external funding for a ballooning budget deficit.

Lawyers for Ecuador and the funds didn’t immediately to respond to request for comment.

GMO, which was co-founded by the legendary money manager Jeremy Grantham, and Contrarian sued on Wednesday, two days before what had been a deadline for investors to decide whether to participate in the plan. The firms, which together hold hundreds of millions of dollars in Ecuadorian debt, claimed the plan unfairly penalizes investors that decide not to participate.

Ecuador embarked on a debt-sale spree in 2014 to offset a decline in the price of oil, its main export. Mounting financial trouble led the country to sign a $4.2 billion funding agreement with the International Monetary Fund in early 2019. Its debt woes were only exacerbated by the pandemic. Ecuador suffered one of the world’s highest death rates

Caproni rejected the funds’ claim that Ecuador defrauded investors in a press release about its tender and exchange offer.

The terms of Ecuador’s proposed debt-swap include a cut in capital of $1.54 billion, a reduction in the average interest rate to 5.3% from 9.2% and an extension of average maturities to 12.7 years from 6.1 years.

The case is Contrarian Emerging Markets LP v. Republic of Ecuador, 20-cv-05890, U.S. District Court, Southern District of New York (Manhattan).

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