The Big Idea
Ecuador | Possible blue bond launch
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Ecuador’s debt buyback headline comes as a huge surprise. The timing is odd with the current administration fighting for political survival through impeachment. There is also no extra cash for buybacks under the current budget, with a structural deficit and limited financing options. The amount and logistics of the buyback suggest this could represent the long-awaited blue bond transaction. The loan should be a one-off event and not a recurrent source for future buybacks. This transaction could set a higher floor on bond prices through May 4 expiration but does not represent a game changer from my current fair value recommendation. This single transaction should not resolve the many medium-term uncertainties about Ecuador’s willingness and ability to pay that trap bond prices at low levels.
Credit Suisse just launched a buyback of three of the four of Ecuador’s bonds, excluding what now looks like an orphaned zero coupon 2030 bond. The other bonds quickly adjusted 2.0 to 2.5 points higher towards the buyback levels with near-term technical support. This operation comes as a total surprise with unusual access to an $800 million loan at a moment of intense political uncertainty with the Lasso administration under threat of impeachment or snap elections and default level bond prices restricting access to credit. These unusual circumstances and the logistics of the tender offer suggest that this buyback could represent the official launch of the blue bond transaction.
There has been much discussion of this transaction since last year and the now heavily discounted bond prices would maximize the savings for marine conservation projects. There is no official confirmation; however, the circumstances and the logistics of the transaction would suggest that the much-delayed blue bond buyback has now launched. The only reference was “The Offeror is making the Offer (subject to the New Financing Condition (as defined below)) as part of a broader refinancing operation to channel savings and promote certain conservation and sustainability efforts of the Issuer.” Belize sets the regional precedent after having successfully repurchased their bonds with a loan from the Nature Conservancy’s blue-bond ocean conservation program last year. Minister Arosemena suggested something similar for Ecuador since last year that would seek to improve medium-term debt solvency and allocate the cashflow savings towards marine conservancy in the Galapagos reserve.
Source: Bloomberg
There is significant firepower on the $800 million against default level bond prices of 32 to 50. The 2035s and 2040s are still trading below the maximum offer price offer of the transaction and are attractive relative to the 2030s. There is rationale to equally target the higher coupon bonds as well as the lower coupon bonds on both near-term liquidity and medium-term solvency relief. The cumulative future cashflow debt service savings could be sizable at $3.5 billion from 2023 through 2040; however, the annual savings would represent around $200 million or less than 0.2% of GDP a year from around 1.6% of GDP a year to around 1.4% of GDP and year and reduce the overall debt stock by 13% (on equal distribution across the curve). This wouldn’t transform the already low liquidity or rollover risks. The calendar of payments was already restructured such that total Eurobond payments wouldn’t exceed more than 2% of GDP a year.
The repayment risk isn’t so much a function of the debt burden but rather the scarce resources to finance a structural fiscal deficit and heavy competing amortization to China loans and IMF exceptional access loans with minimal if any financing resources beyond 2025. The latest political turmoil shows a reluctance amongst the political and social sectors to either tackle a high structural fiscal deficit or reform an uncompetitive economy with low growth prospects and low foreign direct investment. The ability/willingness to pay still remains under the heavy constraint of competing USD liabilities (including now higher marine conservation spending) and few USD resources.
This debt buyback in itself is only piecemeal without a credible medium-term economic program and high risks ahead of a political transition. The challenge for medium-term cashflow management is 1.) shifting the structural central government deficit to surplus and 2.) lowering the gross financing needs. How will the next administration manage the budgetary pressures on prospects of lower oil prices, still higher debt service and limited sources of financing? There is also the competition on diverting those cashflow savings towards higher spending for blue program conservation.
This doesn’t alter my current fair value recommendation with the benefit of a short-term bounce but still amidst fluid political and policy risks that heavily discounts the medium-term payments and will likely trap bond prices at these low levels. The investor positioning is probably still quite heavy with a bias to sell into this strength and to tender into the buyback transaction. The success of the transaction to sell bonds at heavily discounted prices would perversely invite rating downgrades (distressed exchange) and reaffirm the high implied default risk. There are the ESG-related benefits of the blue funding initiatives to the broader economy, especially on tourism and exports. However, the $800 million funding doesn’t seem transformational for medium-term debt dynamics.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
