Ecuador Proposes to Repurchase Bonds with 70 Percent

C O N F I D E N T I A L QUITO 000277

SIPDIS

E.O. 12958: DECL: 04/21/2019
TAGS: EFIN ECON EC
SUBJECT: Ecuador Proposes to Repurchase Bonds with 70 Percent
Discount

Ref: A) Quito 220, B) 08 Quito 1146, C) 08 Quito 1121, D) 08 Quito
1062

Classified by DCM Andrew Chritton. Reason: 1.4 b and d.


1. (U) Summary. The Government of Ecuador announced that it
provided a bond repurchasing proposal to bondholders on April 20.
The GOE said that it will repurchase defaulted bonds at a 70 percent
discount, but provided few details as to how it will manage the
process. End summary.


2. (U) According to media reports, on April 20 the Government of
Ecuador (GOE) presented its debt repurchasing proposal to bond
holders in Quito, New York, and London. Minister of Finance Viteri
announced that the government would purchase the Global 2012 and 2030
bonds at 30 cents on the dollar. The proposed GOE repurchase price
is roughly equivalent to the prevailing price for Ecuador debt on the
secondary market. (Note: The GOE defaulted on the Global 2012 bond
issuance in December and the Global 2030 bonds in March after
asserting the debt was illegal or illegitimate (reftels b-d).)


3. (U) The government will reportedly follow a modified Dutch
auction. The bondholders will have until May 15 to present their
offers, and the GOE will announce which offers it has accepted on May

26. The total amount of outstanding Global 2012 bonds is $510
million and of Global 2030 bonds is $2.71 billion.


3. (U) Details on the government's plan are currently not available.
The following are key questions that the Embassy will monitor as
details become available.


4. (C) How will the GOE conduct the auction? According to a brief
survey we have done of other modified Dutch auctions by commercial
companies, a company will typically announce its intent to repurchase
a certain number of shares or bonds within a specified price range,
select bids starting at the bottom of the range and keep selecting
bids until it reaches its target, with all the bids then receiving
the highest accepted price. The GOE has not publicly announced its
criteria for selecting bids.


5. (C) Will the GOE address interest arrears? The missed interest
payments since November total approximately $165 million. The
government has not indicated whether it will honor those interest
payments.


6. (C) How will the GOE pay for the repurchase? The government is
offering to pay cash for the debt it will repurchase at a discount.
Because of low oil prices, the government is under significant fiscal
pressure (reftel a),has under $3 billion in reserves, and has been
depleting those reserves to cover fiscal and balance of payments
gaps. Presumably the government will not repurchase all outstanding
shares through this process. It is rumored to have already bought a
portion of outstanding bonds on the market working through a
government-owned bank, and some bond holders will likely reject the
offer. Assuming it will repurchase about half of the nominally
outstanding debt, that implies it would spend roughly $500 million.
It does have that financing available in reserves, but that would
further deplete reserves at a time the government should be hoarding
cash to help cover nondiscretionary expenses.


7. (C) How will the government deal with holdouts? We understand
that Argentina restructured its defaulted debt with a discount
roughly comparable to what Ecuador is seeking, and a sizeable
minority refused to accept the restructuring offer. Presumably a
number of holders of Ecuadorian bonds will also refuse to participate
in Ecuador offer and will seek alternate measures to enforce the
bonds.

Hodges