The Republic of Ecuador Responds to Legal Action Filed by Contrarian Capital Management and GMO
Jul 30, 2020, 00:01 ET
QUITO, Ecuador, July 29, 2020 /PRNewswire/ -- Today, Contrarian Capital Management ("Contrarian") and GMO Emerging Country Debt Fund, GMO Emerging Country debt Investment Fund plc and GMO Emerging Country Debt (UCITS) Fund (collectively, "GMO") filed a federal securities class action against the Republic of Ecuador (the "Republic" or "Ecuador") in the United States District Court for the Southern District of New York seeking a preliminary injunction against the Republic in relation to the Republic's solicitation of consents from eligible holders of its bonds and the related invitation to exchange their eligible bonds for a package of new securities to be issued by the Republic, dated July 20, 2020 (the "Invitation to Exchange").
The Republic believes that the legal action initiated by Contrarian and GMO has no merit. Ecuador's market Invitation to Exchange is the outcome of a good faith negotiation with representatives of institutions holding close to 50% of the Republic's 10 series of outstanding series of bonds, with maturities ranging from 2022 to 2030, for a total principal amount outstanding of approximately US$17.4 billion (the "Eligible Bonds"). Pursuant to the agreements and understandings reached on July 6th with a group of bondholders that, as of today, represent more than 53% of the outstanding principal amount of Ecuador's bonds and holding more than or close to 50% of the outstanding principal in almost all series of Eligible Bonds, Ecuador announced its Invitation to Exchange the Eligible Bonds into 3 new series of bonds with maturities in 2030, 2035 and 2040. The Republic therefore disagrees with the contention by Contrarian and GMO, which together hold a small minority of the total outstanding principal amount of the Eligible Bonds, that the Invitation to Exchange is "coercive".
Contrarian and GMO's claims are not supported by the terms of indentures under which the outstanding bonds were issued. In fact, their assertion that effectively every holder must agree is inconsistent with the collective action clauses that were agreed to and documented in the indentures, which are expressly intended to allow the Republic to restructure its debt with the consent of a substantial percentage of the holders. The Republic followed international best practices and guidelines including when considering the use of the collective action clauses set forth in its indentures, and remained committed to a market friendly restructuring and to maintaining a cooperative and amicable dialogue with its bondholders in spite of all uncertainties created by the COVID-19 crisis.
Contrarian and GMO's demands further conflict with Ecuador's realities, as the country that has suffered the most from the COVID-19 crisis in Latin America. In addition to the health crisis, the Republic has also experienced the impact of the abrupt fall in commodity prices, which in turn resulted in substantial cuts in current and capital spending to withstand the loss in income but is still left with a significant financing gaps for the near future. Ecuador is expected to suffer a contraction of 11% of GDP this year according to the latest IMF estimates.
The injuries to the Republic of this action are economic and social in nature. Such legal action could further delay the economic recovery from an unprecedented economic and health crisis.
In short, Contrarian and GMO seek to interfere with the decision of a majority of Ecuador's investors, seeking to extract debt service from the Republic of Ecuador above and beyond what was negotiated in good faith with a majority of and its largest creditors through legal proceedings and delaying tactics. The Invitation to Exchange has received overwhelming support both formally through the Ad Hoc Group (representing over 53% of almost all of the bonds) and informally through constructive feedback received from so far more than 10% of bondholders outside the Ad Hoc Group. Ecuador's restructuring proposal has also been visibly welcomed by the international community, including the IMF, the UN, the World Bank, and the Inter-American Development Bank.
The Republic will vigorously oppose this attempt to derail this necessary transformative transaction. If allowed to proceed, such a legal action would threaten to harm the Republic and its citizens, and would create a dangerous and damaging precedent for other emerging markets sovereigns.
SOURCE The Republic of Ecuador
