When the IMF announced last month that it would lend Ecuador $6.5bn to get its battered economy back on track, the largest piece of a complex debt-restructuring jigsaw fell into place. The loan also capped six month-long negotiations with international creditors on several fronts — which all yielded successful outcomes.
Just as the government was dealing with the coronavirus pandemic and a sharp drop in oil prices, it talked to bondholders about restructuring $17.4bn of debt; asked the China Development Bank for a year-long amnesty on capital repayments while seeking fresh loans from Chinese banks; and renegotiated the terms of bonds issued by state-owned oil company Petroamazonas.
“Ecuador did it,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities. She hailed the IMF agreement as “potentially a game-changer” for a country that was facing a funding shortfall of $4bn this year and has historically been a serial defaulter.
The IMF agreement played an instrumental role: The deal with bondholders was contingent on it. If the IMF had not agreed to a lending programme by the September 1 deadline, the whole restructuring plan could have fallen apart.
The last, outstanding piece in the jigsaw is the new money from China, expected to be about $2bn. Finance Minister Richard Martínez said last week that he hoped to confirm it within weeks. President Lenín Moreno said the money should be in Ecuadorean coffers by the end of the year.
One of the secrets to Ecuador’s success has been good faith. In March, just as coronavirus hit, the state was due to make a $341m capital payment to bondholders. Pressed by critics to default and use the money to tackle the pandemic, the government honoured its obligations. That paved the way for largely cordial talks from then on.
Another key factor was the structure of Ecuadorean bonds. They contained collective action clauses (CACs) that permit a supermajority of bondholders to approve changes to them. The measure is designed to reduce the need for litigation.
Evan Koster, a partner at Hogan Lovells Capital Markets, who advised the government, said this was one of the first big tests of CACs in capital market transactions. “In Ecuador’s case, the existing contractual framework contained these clauses, and I think that was critical to our success,” he said.
The negotiations were not frictionless: In July, when the government announced a provisional deal with creditors, some investment groups refused to sign up. For a while it seemed the government might have to sweeten its offer.
Then there was an eleventh-hour courtroom drama. Two groups, Contrarian Capital Management and GMO, filed a lawsuit hours before bondholders were due to vote on the deal, arguing that the plan was “coercive in the extreme”. A judge in New York threw out their case paving the way for creditors to approve it.
Even then, the deal was not in the bag. The Ecuadorians needed an agreement with the IMF. The Fund eventually agreed to lend Ecuador $6.5bn over the next 27 months.
Not everyone is happy with the outcome. Contrarian and GMO felt they were pushed into an unfavourable deal and on the eve of the IMF announcement a group of academics wrote to managing director Kristalina Georgieva accusing the Fund of playing “a major role in leading Ecuador down a path of disastrous fiscal austerity”. They said the new deal would only exacerbate the country’s difficulties.
For now, though, the Moreno government is basking in the glow of its achievements and some are hailing the deal with bondholders as an example to follow.
“There will be other countries that face these issues,” one person who was closely involved in the negotiations said. “A combination of having the right legal terms and the right approach — dialogue — worked in Ecuador and I think it will be used in other countries in the future.”