World’s Costliest Bond Sale in Decade Shows Ecuador Cash Crunch

By Katia Porzecanski and Nathan Gill
(Bloomberg) — Six years ago, Ecuador President Rafael Correa’s government denounced the 10 percent in annual interest the country paid on its bonds as “usury.”
So when the 51-year-old former economics professor was willing to pay 10.5 percent in a sale of notes this month, it raised speculation the OPEC nation may be running short of cash after oil prices collapsed.
Before the March 19 sale, Ecuador told potential buyers it wanted to pay less than 8 percent to borrow at least $1 billion for as long as seven years, two people with knowledge of the offering said. Instead, the Andean nation got just $750 million for five years at yields that were more than two percentage points higher.
The sale “indicates that they are running into trouble,” Sarah Glendon, an economist at Gramercy Funds Management LLC, said by telephone from Greenwich, Connecticut.
The more than 50 percent plummet in the nation’s oil prices from their June peak last year caused bond investors to demand more compensation to finance Ecuador’s widening budget shortfall, less than a year after the country borrowed $2 billion for a decade at lower rates.
Even after a round of spending cuts, the government, which gets about a quarter of its revenue from oil, has a record $10.5 billion of financing needs this year. That’s compelled Correa to court banks, international investors, companies and foreign governments to close the deficit.
Yield Curve
In the latest sale, the annual interest that Ecuador agreed to pay to issue five-year bonds was the highest of any comparable dollar-denominated security since an offering by Turkey in 2002, according to data compiled by Bloomberg.
The yield was also higher than on Ecuador’s bonds due in 2024, which is unusual because shorter-dated debt usually carries lower borrowing costs.
Yields on the 2024 securities have jumped 0.95 percentage point since the country started meeting with investors to discuss the sale of the new notes to 9.86 percent. During the same period, average yields for developing nations fell, according to indexes from JPMorgan Chase & Co.
The Finance Ministry and Economic Policy Ministry didn’t respond to telephone messages or e-mails seeking further comment on the bond sale.
On the night before this month’s sale, Economic Policy Minister Patricio Rivera told reporters in Quito that Ecuador would opt for cheaper funding sources from other governments until bond market conditions were better.
Energy Prices
“Then they came, out of the blue, with a five-year at 10.5 percent, saying pricing would not tighten and implying that they would take as much as the market was willing to give them,” said Marco Santamaria, a money manager at AllianceBernstein LP in New York. He declined to comment on whether he bought the bonds.
Finance Minister Fausto Herrera told reporters after the sale that the government didn’t get the “best conditions.” Energy prices fell during the government’s roadshow with investors earlier this month, forcing Ecuador to accept worse terms than it wanted, Herrera said.
Yields on the notes due 2020 were unchanged at 10.41 percent as of 3:06 p.m. in New York.
Correa said Saturday that the economy was strong and that the government was ready if oil prices kept falling.
‘Extreme Cases’
“We’re prepared for extreme cases, even if oil prices fall to $20 a barrel,” Correa said in his weekly speech to the nation. “We know how to handle these difficult times.”
Before Ecuador defaulted on about $3.2 billion of foreign bonds in 2008 and 2009, a government-sponsored commission formed by Correa concluded that much of the debt taken out by previous governments was illegal, in part because of the high interest rates charged.
The fact that Ecuador was willing to issue debt with such high interest rates is “very unusual,” said Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group LLC in New York.
“This deal made Ecuador look desperate,” Morden said.

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