Ecuador Debt Rises as Government to Repay Second Bond Ever

(Bloomberg) -- Ecuador bonds rose after the nation said it will make a $325 million debt payment on Tuesday, only the second time it has fully repaid a bond since independence from Spain two centuries ago.

Notes due in 2028 rose 3.8 cents to 21.5 cents on the dollar amid gains in risk assets worldwide and after Finance Minister Richard Martinez said late Monday the government will pay bonds maturing today. He also said the nation will put on hold close to $200 million of interest payments, using grace periods to spend the money instead on the health and economic impact of the coronavirus outbreak.

Analysts from firms including Goldman Sachs and Citigroup said the decision suggests the government is willing to avoid a unilateral default. Even so, Fitch Ratings downgraded the country for a second time in less than a week, saying “a default of some kind” is expected.

“If the commodity shock persists, then bondholder payments are at risk for default,” Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont wrote in a note. Any relief rally will be tempered by the use of the grace period, which seems to be a political concession to manage domestic pressures, she added.

The finance minister said the bond repayment and use of its grace period on bonds due 2022, 2025 and 2030, with the backing of the International Monetary Fund, will allow Ecuador to retain access to external funding.

He added that Ecuador “will hold talks with commercial and multilateral creditors in the next days to implement a consensual reorganization of pending liabilities.”

Ecuador expects combined disbursals of $1 billion to $1.5 billion from the likes of the IMF, Andean Development Corporation, Inter-American Development Bank and China within weeks. It’s also discussing stretching out debt repayment obligations with China.

Separately, the IMF said it was working to free funds as soon as possible under terms of a rapid financing instrument and on a successor to a $4.2 billion financing deal. According to Goldman Sachs, Ecuador’s economy will contract at least 2.7% in 2020 given the deterioration in the global outlook for growth and oil prices.

“Ecuador is suffering multiple shocks which are leading to an extremely challenging situation for the country,” Citigroup Inc. strategists led by Dirk Willer wrote in a note. “The postponement of the coupon payment shows how tight the liquidity situation is.”

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