Los bonos

Debt Bonds: What are they and how have been issued in Ecuador?

According to Levinson (2008), the word “bond” means a contract, agreement or guarantee, which is mainly used by the issuer, to diversify sources of financing. Court and Tarradellas (2010) add that bonds are debt securities or instruments, which governments and companies can contract with their holders, in exchange for future payments for interest and capital. The bonds began to be issued by governments, during the twelfth century of the Middle Ages, to finance wars. The first bond of which there is a record, corresponds to one issued by the Bank of Venice (northern Italy), to finance a war against Constantinople, as Levinson (2008) explains.

As stated by Court and Tarradellas (2010), the types of debt bonds can be classified according to: Government Obligations, Corporate Debt Instruments, mortgage guarantees, etc. Levinson (2008) mentions that bonds can be classified by the issuing entities in: a) National Governments, also called Sovereigns, are issued by the various states of the world, and tend to be the safest. b) Lower Level Governments, which allow financing works for the benefit of a province or commune, such as street improvement, park arrangement, etc. c) Companies are those issued by private entities, in order to finance their own projects. d) Securitization Instruments, which are bonds that are backed by assets, such as a portfolio of accounts receivable. Different bibliographic sources convey that the safest bonds in the world are the United States treasury bonds (called Treasuries Bonds). In South America, the Sovereign Bonds of Chile are called Chile, adding the last two numbers of the year in which they were issued (Example: Chile-05). In Argentina there are the National State Bonds (BODEN) and the Argentina Nation bonds in Pesos (BONAR). Private companies such as Banco Pichincha of Ecuador and Banco de Crédito e Inversiones of Chile have financed projects, through the issuance of bonds.

Levinson (2008) claims that bonds can also be classified as: a) Ordinary, which are the ones that pay their interest in coupons until their expiration date. In addition, the payment of its Nominal Value is made on a specific date. b) Redeemable, where the issuer can reserve the right to redeem the bonds on certain dates. Upon a redemption request by the issuer, the bondholder has the obligation to sell the bonds at the price stipulated in its issuance, which normally exceeds the current market price. c) Non-refundable, where the initial conditions of its issuance are respected, as it also prohibits the issuer from selling new bonds. d) With Resale Option, where the holder has the right to resell the bonds to the issuer for their nominal value on certain dates. e) Perpetual Obligations, are bonds that last forever, unless the holder agrees to sell them again to the issuer. f) Zero Coupon, are those that do not pay interest and their only flow is their Even Value. They are made so that the investor has no risk of reinvestment. g) Convertibles, where they grant their holder the option to exchange them for shares of the issuer, at a pre-set price. h) Variable Interest, responds to fluctuations in short-term interest rates.

That being said, along with Miño Illes (2014) regarding the issuance of bonds from international private markets, in Ecuador there are factors that should be taken in consideration, among others, the fiscal deficit, external debt, the will and ability to pay the issuance of a bond from international private markets. Debt bonds have been extremely important in the country, starting with Brandy Bonds in 1994, following by Global Bonds in 2005 which were declared illegitimate, and their payments were suspended because they were not created for the benefit of the country. In June 2014, the Sovereign bonds were issued.

As per Tapia (2019), the country created the strategy known as Liability Management that consisted on carry out an offer of a buyback of the bonds that expired in 2020 and finance through the issuance of bonds of longer term that expire in 2029. If Ecuador had not used this strategy, the country would have to pay 1.500 million dollars of capital of the bonds in March of next year. And now the government put in the market 1.125 million dollars in bonds for red-debt.

According to Diario El Universo (2019), it is also important to know that between the period of 2014 to 2019, Lenin Moreno’s and Rafael Correa’s government issued bonds to get financing of 16.339 million dollars in order to overcome the fiscal deficit. Currently, based on the information provided by the International Monetary Fund (IMF), the country risk rate of Ecuador is 592 points. This rate is necessary for the issuance of bonds. Moreover, the factors affecting the bonds issuance are the credit rating of Ecuador given by Standard & Poors, the rate of Treasuries Bonds, and the specific characteristics of the bonds (coupon rate, expiration term, and rate yield). Besides, in August of this year, the rating agency “Fitch Ratings” improved Ecuador’s ranking (even though is still B) from negative to positive.

To conclude, debt bonds are instruments used by Nations in order to overcome their fiscal deficit. In Ecuador, throughout history, we have gone through crises that were remedied by issuing bonds. However, as in the majority of developing countries, there are certain limitations when it comes to the issuance and expiration of bonds, as it already occurred in 2014 with Global Bonds and as is the case with the debt rebalancing to beat in 2020.

Furthermore, as in most countries of South America, Ecuador once the bond is close to maturity, performs a debt repurchase operation with the issuance of new bonds, which allows a “refinancing” of the State's debt with third parties. On the other hand, sometimes the rulers of a country do not agree with the direction of the funds obtained by their predecessors through the bond, which not only creates conflicts but, as happened in the Ecuadorian case and in many others, decreases the credibility of the country, affecting the long term.

Según Levinson (2008), la palabra "bono" significa un contrato, acuerdo o garantía, que es utilizado principalmente por el emisor, para diversificar las fuentes de financiamiento. Court y Tarradellas (2010) agregan que los bonos son títulos o instrumentos de deuda, que los gobiernos y las empresas pueden contratar con sus tenedores, a cambio de pagos futuros por intereses y capital. Los bonos comenzaron a ser emitidos por los gobiernos, durante el siglo XII de la Edad Media, para financiar guerras. El primer bono del cual existe un registro, corresponde al emitido por el Banco de Venecia (norte de Italia), para financiar una guerra contra Constantinopla, como explica Levinson (2008).

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