The Long and Short
Weaker Colombia sovereign credit drags down Ecopetrol SA
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Ecopetrol SA has recently seen the outlook on its ‘BB+’ rating cut to negative by Standard & Poor’s following a similar action on the sovereign rating of Colombia. S&P based the reduction of the Colombia rating on concerns around declining private investment, which would in turn pose risks to GDP growth returning to its trendline above 3%. Despite the correlated ratings action, the agency maintained Ecopet’s ‘BBB-‘ stand-alone credit profile (SACP).
The negative outlook on Colombia reflects the agency expectation that the country’s rating could fall in the next two years if economic growth misses its targets. Embedded in the outlook change for Ecopet also is the increased risk that the government could increase taxes or dividends if the country faces fiscal or external stress, which would in turn negatively affect the company’s credit profile.
In the near term, given that Ecopetrol is expected to remain aligned with the Colombian government’s plans for energy transition, the company is expected to maintain its strategies for carbon dioxide emissions reductions and to maintain its targets for 2040. These factors support the agency’s standalone credit profile on the company, so S&P does not anticipate a change in the current SACP for the next 12 months with net debt-to-EBITDA expected to remain below 2x
The ratings action follows the recent issuance of Ecopet’s 12-year bonds that, in turn, offered concession value to investors after a period of tightening across the curve. The $1.85 billion 12-year 8.375% bond issued at 99.441% to yield 8.45%, taking strong advantage of the price performance in the belly over the last couple of months. Though the long end had rallied also, particularly after the dovish Fed pivot in December, the 2045s or 2043s trade in an unhospitable discount to par price territory, thus making the long belly a more practical access point on the curve. The issuance process and initial yield level of the new 2036s drove some widening off the tights for the existing belly bonds also. The new issue pre-funded the 2025 bond maturity and the excess proceeds are expected to be used to partially offset amortizations this year also. As a result, any new issue overhang to valuations will exit the narrative for the near term with the 5.375% $1.5 billion bond that matures in June 2026 the next US collar issue for the credit to face. The new Ecopet paper looks good and should tighten further to the sovereign as the issue beds in. Price action post the ratings action is liked to be muted, though is more likely to be expressed in the sovereign, adding to compression potential.
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