Ecuador saw order books swell to US$8bn on Wednesday as it launched a US$2.5bn 10-year bond, the country’s largest deal in decades and its third this year.
Investors shrugged off weak fundamentals and supply risks and instead focused on newly installed President Lenin Moreno’s efforts to break with the populist policies of his predecessor.
Moreno won election in April promising to maintain the leftist programs of the former president Rafael Correa, who oversaw a selective default on dollar bonds in 2008.
But since taking office, he has attacked Correa’s economic policies and taken a more market-friendly approach.
“The new president is cracking down on corruption and engaging with the business community,” said Shamaila Khan, a director of AllianceBernstein’s emerging market debt strategies.
“He is definitely trying to break with the past - which is a good thing.”
The new administration also brought in new banks to lead Wednesday’s deal, which was expected to be rated B-/B.
It dropped Citigroup, which has been the sole lead on all of Ecuador’s dollar bonds since 2015, and hired Credit Suisse, Deutsche Bank and JP Morgan.
Strong demand allowed those leads to tighten pricing by 3/8 before launching the deal at a final yield of 8.875%, the tight end of guidance of 9% area (+/-12.5bp) and inside initial price thoughts of 9.25% area.
At that level, Ecuador was about 35bp wide to the existing 2027s, which hit a low on Tuesday of 8.57% after rallying from a peak of around 10% in July, according to Thomson Reuters data.
Despite the rally, the credit still looks cheap compared to Single B peers and other oil exporting nations in that ratings category.
“If you look at anything - with the exception of Venezuela - this trade looks cheap,” said Kahn.
Angola 2025s (B1/B-/B) are trading at around 8.14%, Iraq’s 2028s (Caa1/B-/B-) at 7.10% and Egypt’s 2027s (B3/B-/B) at 5.99%.
Other Latin American Single B sovereigns are even tighter, with Argentina’s 2027 (B3/B/B) being quoted at around 5.40%, and El Salvador 2027s (Caa1/CCC+/B-) at around 6.25%.
“Ecuador is one of the highest carry trades out there,” said Siobhan Morden, head of Latin America fixed-income strategy at Nomura.
Ecuador has also grown in popularity as an alternative to Venezuela, which is looking increasingly likely to default over the next year.
“It is a proxy trade for Venezuela, if investors are looking to supplement that forfeited yield,” said Morden.
Even so, market participants agree that the strategy of funding fiscal deficits with international bond deals is not sustainable.
With Wednesday’s trade, the country has now raised US$8.25bn in the foreign bond market since July 2016 - a lot of money for such a relatively small economy.
Relying on foreign funding is all well and good when markets are as bullish and yield thirsty as they have been, but those windows can quickly slam shut, say analysts.
“Issuing US$5bn or so in one year is unsustainable and they will have to show how they will reduce the structural deficit,” Morden said.
The timing of the new trade was critical as reserves hit extremely low levels, she said.
International reserves stand at about US$3.8bn, covering 1.9 months of current-account payments in 2017 and down from 2.3 months a year earlier, Fitch said in a report last month.
“They are not only funding for the fiscal account but for the external account as well,” said Morden.
“Without sufficient funding since July, they have been forced to cut back on spending.”
Fitch expects the fiscal deficit to drop to around 5.9% of GDP this year after peaking at 7.4% in 2016.
But general government debt hit 40% of GDP in 2016 and is expected to continue to rise, it said.
The new president has been looking to better relations with the International Monetary Fund and the US as it seeks to cover the budget shortfall for this year and next.
“They have engaged with the IMF and could go to the IMF if the market closed,” said Kahn.
