The Long and Short

Weaker Colombia sovereign credit drags down Ecopetrol SA

| January 19, 2024

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.

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.

Declan Hanlon
declan.hanlon@santander.us
1 (212) 973-7658

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.

The Library

Search Articles