Ecuador’s Successful $17.4 Billion Sovereign Debt Restructuring

Cleary Gottlieb represented Citigroup Global Markets Inc., as dealer manager, in the Republic of Ecuador’s (Ecuador) successful consent solicitation and invitation to exchange from holders of 10 series of debt securities with an aggregate principal amount outstanding of approximately $17.4 billion.

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 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, and 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 redesignate series of notes in a two-limb aggregated voting mechanism. The invitation to exchange commenced on July 20, 2020, and 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. The 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, 2020. The agreement was announced by the IMF on the evening of August 28, 2020, allowing Ecuador to proceed with the settlement of the transaction on August 31, 2020.

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 U.S. District Court for 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 Valerie E. 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 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; a restructuring to the terms of bonds issued by Petroamazonas, a state-owned company engaged in the exploration and development of oil reserves; and a restructuring to the terms of the social bonds due 2035 issued by Ecuador.