Ecuador’s $17.4 Billion Sovereign Debt Restructuring

Cleary Gottlieb and Pérez Bustamante & Ponce represented Citigroup Global Markets Inc., as dealer manager in connection with the successful consent solicitation and invitation to exchange by the Republic of Ecuador (“Ecuador”) from holders of 10 series of debt securities with an aggregate principal amount outstanding of approximately $17.4 billion. Hogan Lovells advised the Republic of Ecuador and Perkins Coie advised the Bank of New York Mellon. White & Case LLP advised the Ad Hoc Ecuador Bondholder Group on the deal.

Ecuador solicited consents to amend certain terms and conditions of the indentures governing its global bonds due 2022, 2023, 2024, 2025, 2026, 2027 (two series), 2028, 2029 and 2030 (the “old notes”) by relying on the collective action clauses included in such indentures. The modifications included amending the terms and conditions of the old notes to replicate the maturity and economic terms of a new series of 2040 bonds and reducing the outstanding principal amount of the old notes such that, for every $1,000 principal amount originally due, only $911.30 principal amount would remain outstanding.  Ecuador’s consent solicitation commenced on July 20, 2020, expired on August 3, 2020 and the supplemental indentures reflecting the proposed amendments became effective on August 31, 2020.

Simultaneously with the consent solicitation, Ecuador also invited holders of its old notes (as amended pursuant to the consent solicitation) to exchange their old notes for a package of new securities due 2030, 2035 and 2040. The indenture governing the new securities introduced for the first time additional rights to bondholders in the use of collective action clauses by establishing protections against the sequential use of the CACs on an aggregated basis and an issuer’s right to re-designate series of notes in a two-limb aggregated voting mechanism. The invitation to exchange commenced on July 20, 2020, expired on August 7, 2020 and the new securities were issued on August 31, 2020.

Holders of more than 98% of the aggregate principal amount of Ecuador’s old notes (except for the global bonds due 2024), and holders of more than 95% of the aggregate principal amount of Ecuador’s global bonds due 2024, consented to the proposed amendments and tendered their old notes in the invitation to exchange.  he proposed amendments became binding on all holders of all series of old notes by operation of the collective action clauses.

The consent solicitation and invitation to exchange were conditioned on the International Monetary Fund (IMF) announcing a staff-level agreement on a new funded program for Ecuador on or before September 1. The agreement was announced by the IMF on the evening of August 28, allowing Ecuador to proceed with the settlement of the transaction on August 31.

A few days after the consent solicitation and invitation to exchange were announced, a minority group of bondholders filed a putative class action in the Southern District of New York, seeking a temporary restraining order to halt the restructuring on the basis that Ecuador allegedly committed securities fraud in violation of Section 10(b) of the Exchange Act and Rule 10b-5(b). The case was assigned to Judge Caproni, who convened multiple telephonic conferences and ordered expedited briefing over a two-day period. The Court denied the temporary restraining order at the end of a telephonic hearing on July 31, 2020. This was the first ruling by a New York court on the use of collective action clauses to effectuate a proposed sovereign debt restructuring.  The group of bondholders agreed to dismiss the action shortly thereafter.

The consent solicitation and invitation to exchange reflect the last step in Ecuador’s debt restructuring process which included (i) an interest deferral transaction in April 2020 that extended the grace period for interest payments on the old notes to create conditions for an orderly discussion between Ecuador and the official sector, as well as between Ecuador and an ad hoc group of holders of old notes, (ii) a restructuring to the terms of bonds issued by Petroamazonas, a state-owned company engaged in the exploration and development of oil reserves, and (iii) a restructuring to the terms of the social bonds due 2035 issued by Ecuador and partially guaranteed by the Inter-American Development Bank.

The Ad Hoc Group comprises major institutional holders of Ecuador’s external sovereign debt including, among others, funds managed or advised by AllianceBernstein, Ashmore Investment Management Limited and Ashmore Investment Advisors Limited, BlackRock Financial Management, Inc. and its affiliates, BlueBay Asset Management LLP, and Wellington Management Company LLP.

Hogan Lovells advised the Republic of Ecuador with Evan Koster, Bruno Ciuffetelli, José F. Valdivia, Gastón Fernández, Ron Silverman, Dennis Tracey, Michael Hefter, Seth Cohen e Ivan Zapien. Consejeros David Contreiras Tyler, Philip H. Ehrlich, Adam Lapidus, Philip Schuster, Dana M. Turjman,  Juan D. Moreno, Austin Gassen, Julia Grabowska, Jonathan Wieder, Philip Robb, Kieron O’Callaghan, Nick Tidnam, Hannah Piper, Jerome Finnis and Victor Barrientos.

The Cleary Gottlieb deal team was led by partners Andrés de la Cruz (Picture) and Manuel Silva and included associate Antonio Pietrantoni, international lawyer Manfred Heyn, and law clerk Jason Benitez. Associate Ignacio Lagos advised on matters relating to the indenture governing the new securities, including the collective action provisions. Partner Jason Factor and associates Lorenz Haselberger, Victoria Ju, Michael Sims, and Eric Gruebel advised on tax issues. Partners Carmine Boccuzzi and Jared Gerber, associate Rathna Ramamurthi, and law clerk Abigail Gotter-Nugent advised on litigation matters.

Perkins Coie advised The Bank of New York Mellon with Sean Connery and Linc Finkenberg.

White & Case LLP advised the Ad Hoc Ecuador Bondholder Group, the largest group of the Republic of Ecuador bondholders, with partners Ian Clark (London), Thomas MacWright (New York), Brian Pfeiffer (Miami), and associate Dimitrios Lyratzakis (London).

Involved fees earner: Carmine Boccuzzi – Cleary Gottlieb Steen & Hamilton; Andrés De la Cruz – Cleary Gottlieb Steen & Hamilton; Jason Factor – Cleary Gottlieb Steen & Hamilton; Jared Gerber – Cleary Gottlieb Steen & Hamilton; Eric Gruebel – Cleary Gottlieb Steen & Hamilton; Lorenz Haselberger – Cleary Gottlieb Steen & Hamilton; Manfred Heyn – Cleary Gottlieb Steen & Hamilton; Victoria Ju – Cleary Gottlieb Steen & Hamilton; Ignacio Lagos – Cleary Gottlieb Steen & Hamilton; Antonio Pietrantoni – Cleary Gottlieb Steen & Hamilton; Rathna Ramamurth – Cleary Gottlieb Steen & Hamilton; Manuel Silva – Cleary Gottlieb Steen & Hamilton; Michael Sims – Cleary Gottlieb Steen & Hamilton; José Valdivia – Hogan Lovells; Victor Barrientos – Hogan Lovells; Bruno Ciuffetelli – Hogan Lovells; Seth Cohen – Hogan Lovells; David Contreiras Tyler – Hogan Lovells; Philip Ehrlich – Hogan Lovells; Gaston Fernandez – Hogan Lovells; Jerome Finnis – Hogan Lovells; Julia Grabowska – Hogan Lovells; Michael Hefter – Hogan Lovells; Evan Koster – Hogan Lovells; Adam Lapidus – Hogan Lovells; Juan Moreno – Hogan Lovells; Kieron O’Callaghan – Hogan Lovells; Hannah Piper – Hogan Lovells; Philip Robb – Hogan Lovells; Philip Schuster – Hogan Lovells; Ronald Silverman – Hogan Lovells; Nick Tidnam – Hogan Lovells; Dennis Tracey III – Hogan Lovells; Dana Turjman – Hogan Lovells; Jonathan Wieder – Hogan Lovells; Ivan Zapien – Hogan Lovells; Sean Connery – Perkins Coie; Linc Finkenberg – Perkins Coie; Ian Clark – White & Case; Dimitrios Lyratzakis – White & Case; Thomas MacWright – White & Case; Brian Pfeiffer – White & Case;

Law Firms: Cleary Gottlieb Steen & Hamilton; Hogan Lovells; Perkins Coie; White & Case;

Clients: AllianceBernstein L.P.; Ashmore Investment Advisors Limited; Ashmore Investment Management Limited; Bank of New York Mellon; BlackRock Financial Management; Bluebay Asset Management; Citigroup Global Markets Ltd; Republic of Ecuador; Wellington Management;

Author: Ambrogio Visconti.