by Rob Dwyer
Panama and Ecuador tapped the international markets in March ahead of an expected rise in US interest rates. However, while Panama’s timing appears shrewd, locking-in a 10 year deal that yielded 3.889%, Ecuador’s expensive, short-dated transaction raised questions about its strategy and financing needs.
Ecuador priced (at par) a 10.5%, $750 million 2020 bond on March 19. On the deal roadshow, sole-led by Citi, the B3/B+/B rated sovereign said it wanted to raise over $1 billion of 10-year debt. It was also hoping to avoid a double-digit yield so its decision to proceed with the sale has prompted investor speculation about the country’s financing needs, despite Ecuadorian officials stating they had no external financing needs until 2016.
It was Ecuador’s second deal since it defaulted on its 2008 bond. The first deal, in June of 2014, saw the sovereign raise $2 billion of 10-year paper that yielded 7.95%. Since then, however, the country’s risk profile has deteriorated in direct relation to the drop in oil prices – which continued to fall by a further 13% during the roadshow, causing the outstanding 2024s to increase in yield from 8.7% to 9.8% in just a couple of weeks.
“We added Ecuador 24s to our top five on January 22 when yields were 10.5%, after they had risen from 7.5% in October/November,” says Stuart Culverhouse, global head of research at Exotix. “The yield fell to 9% in February but has widened out again and is now 10%.”
|Ecuador has been among the sell-off in bonds from oil-exporting countries but Ecuador has sold off more. The premium does suggest some amount of investor caution |
Ecuador relies heavily on oil revenues for more than 50% of its exports. The government has responded to the fall in oil prices by cutting $1.4 billion from this year’s budget. The decision to print at such high levels has led some investors to question whether the latest deal was done to pay for the principal repayment of a $650 million, 9.375% deal that expires in December, which, if paid, would be the first time the country has repaid an international bond in full.
“We were told that the 2024s [issued last year] would go to finance the principal repayment of the 2015s but the whiff of desperation in this latest deal makes me wonder if they need the dollars for this repayment,” says one EM investor.
Ecuador’s need for finance is also reportedly more pressing with capital flows from China – a traditional source of funds for the Latin American country – becoming more restricted.
Culverhouse says 10% usually deters issuers from coming to the market and he notes the irony of the pricing levels of the 2024s. “The coupon on the new issue being comparable to that on the bonds [Ecuadoran president Rafael Correa] defaulted on six years ago, saying their coupon was too high, and now they appear to be saying this level is fair for the credit,” he says.
This lingering question about Ecuador’s willingness to pay is reflected in the latest deal’s risk premium.
“Ecuador has been among the sell-off in bonds from oil-exporting countries but Ecuador has sold off more,” says Culverhouse. “In the good times the country was part of a homogenous group but now is widening more because of greater differentiation. That plays to the historical arguments [of Ecuador’s default in 2008] and the premium does suggest some amount of investor caution.”
Ecuador’s pricing is all the more surprising given the relative imbalance between demand and supply in the EM bond markets – with Panama’s deal a good illustration of liquidity for deals from less risky credits.
In early March Panama took advantage of a rally in 10-year treasuries to sell $1.25 billion of 2025 bonds with a 3.75% coupon. The deal was priced to yield 3.889%, which was 178 basis points over treasuries, with Bank of America Merrill Lynch and Deutsche Bank taking advantage of more than $6 billion in orders to compress the spread from initial price thoughts of 200bp. The issuer’s rating – Baa2/BBB/BBB – and the relative lack of supply elsewhere generated the large demand – that will continue to offer the stronger-rated Latin American sovereigns and issuers good pricing.
For weaker credits, there will still be access but the timing will be crucial and investors say greater differentiation and risk aversion have repriced this segment of credit.
“It all depends on the timing and the window but if you have a relatively settled market for a week then these issues can go quite quickly,” says Culverhouse.
“It is more difficult for the debut issuer or one that is being clearly opportunist – they will now have to pay more than they would have previously – and we don’t expect yields to go back down to their all-time lows of 2014. Treasury managers will have to get used to that; if they had issued two years ago at 6% it’s now 8%. For many of [these issuers] that’s OK. The message is that, for a lot of countries that have good track records in the policy space then demand will still be there. The others really need to embark on fiscal adjustments because the appetite in terms of new issuance can diminish quickly.”