By Luis Fierro (*)
The government of Ecuador announced on August 3rd that it had obtained the consent (favorable “votes”) of 97.85% of the holders of external debt bonds in favor of a bond swap, much higher than the required 66 % (95.42% in the case of the 2024 bonds, which required 75%). The term was extended until August 7th to allow those who had not given their consent to join the exchange.
This is
undoubtedly excellent news for Ecuador, and the team of Minister Richard
Martínez, as well as the country's financial and legal advisers, should be
congratulated.
Through the
agreement, the series of 10 bonds (originally maturing between 2022 and 2030)
will be exchanged for three new bonds, which mature in 2030, 2035 and 2040 (the
repayments of capital are distributed in five years, in each case).
There will be an
immediate reduction in the amount of principal owed by $ 1.54 billion (a 9%
decrease from the original amount of $ 17,375 million), but it is estimated
that the arrangement will allow a reduction in net present value (NPV) of 41,7%
(based on a discount rate of 10 % per year).
This saving is
produced mainly by the reduction of interest rates from an average of 9.2% per
year to 5.3% per year, to which is added the aforementioned 9 % reduction of
the principal; and the extension of the terms (from an average of 6.1 years to
12.7 years). It also reflects the postponement of the payment of the suspended
interest payments in the March-August period ($ 818 million), which will be
paid with interest-free bonds between 2026 and 2030.
The discount rate
is the opportunity cost of money: you are indifferent to receiving 90 now or
100 a year from now. It is related to the average return on capital in an
economy. Some analysts prefer to use a higher rate (12%), although the World
Bank uses a discount rate of 5% for the cost-benefit analysis of its projects
(currently there are few legal activities that guarantee an annual return
greater than 5%).
Two investment
funds, GMO and Contrarian Capital, filed a lawsuit in a court in the Southern
District of New York, arguing that the government's proposal was coercive. The
two funds were part of a "Steering Committee" of holders who claimed
to represent about 25% of the bonds, which presented a proposal that was less
advantageous to Ecuador. But after Judge Caproni dismissed their arguments and
did not give way to a "temporary restraining order" to stop the vote,
even the two plaintiff funds accepted Ecuador's initial offer.
All this occurred,
in addition, in the midst of the confrontation between the government of
Argentina and its bondholders. The Argentine government offered a 47% reduction
in net present value, and the bondholders counter-offered a 44% reduction. On
August 4 (one day after Ecuador) an agreement was announced for a 45.2%
reduction in VPN (using the same 10% discount rate).
The lower discount
in the case of Ecuador could be attributed to the fact that the IMF had not
considered the country's external debt unsustainable, unlike Argentina.
It is important to
clarify is that the restructuring of the bonds will not imply the inflow of new
funds to the country. It does reduce the debt service burden, by $ 1,361
million in 2020, and a total of $ 10 billion through 2025 (kicking forward the
bulk of amortizations).
But it does not
contribute in any other way to reducing the fiscal deficit or closing the
financing gap, estimated at $ 4 billion. For this, a new program is being
negotiated with the IMF, the same one that will take into account the reduction
of the debt in bonds, as well as the fiscal consolidation efforts already made;
but will likely seek a greater deficit reduction and structural reforms.
New $ 2.4 billion
loans from Chinese banks have also been announced; as well as postponing the
payment of the principal of $417 million that was due in 2020-21. In the case
of the bilateral debt with China, a reduction in the principal and the interest
rate of the current loans is not expected, although the interest rate of new
loans is expected to be lower. The G-7 has urged China to join the debt relief
efforts associated to the global pandemic under the Paris Club (China does not
belong to this creditor forum).
It would be unfortunate if the next government returned to increasing the debt, as the Correa and Moreno governments did. Correa quadrupled the public debt (going from $ 10,234 million in December 2009 to $ 41,894 million in May 2017). Part of the blame also falls to the investors, who until last year lent money to Ecuador given the high expected rate of return, despite the risk of being a country that competes with Argentina and Venezuela for the world record of debt defaults.
(*) A shorter
version of this note was published in Spanish in “Diario El Universo” on August
7th.
https://www.eluniverso.com/opinion/2020/08/07/nota/7932633/reestructuracion-bonos
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