Analysts Expect Swift Resolution To Ecuador-Perenco Dispute

Ecuador is expected to deal quickly with Anglo-French oil company Perenco's efforts to enforce a multi-million dollar award payment as delaying could cast a shadow over international bond payments down the line, analysts said.

A Luxembourg bailiff had ordered banks to freeze assets held by Ecuador at accounts in the country on July 28 as a result of a dispute over a $391 million settlement award that Anglo-French oil company Perenco says remains unpaid, a document seen by Reuters shows.

As part of the debt restructuring on its international bonds that followed Ecuador's default two years ago, Ecuador sold new bonds maturing in 2030, 2035 and 2040, which are listed on the Luxembourg stock exchange.

However, some bond holders received interest payments which had been due on the bonds on July 31, sources familiar with the matter said on Monday.

Fabio Trevisan, partner and head of BSP's Dispute Resolution practice, the law firm representing Perenco, declined to comment on the interest payments received.

Ecuador's economy ministry said on Monday it had not been formally informed of the asset freeze and would establish payment terms for the settlement, which it said was for some $374.3 million.

The figure rises to $391 million when including post-award interest. This is down from the $412 million awarded in May last year after taking into account compensation Perenco was ordered to pay Ecuador for environmental damage caused in the areas where it operated in Blocks 7 and 21.

While the freeze order may have come late enough to allow the coupon payment to be transferred to bondholders, it may cause problems for $235 million of interest payments due January 2023 if the issue with Perenco is not resolved, said Nathalie Marshik, head of EM sovereign research at Stifel.

"We highly doubt (President Guillermo) Lasso administration would risk its credit profile by letting this issue linger for the next six months," Marshik wrote in a note to clients.

The government will likely seek a stay in order to continue making bond payments, Eurasia Group's analysts Risa Grais-Targow and Yael Sternberg wrote in a note.

"However, if those legal efforts prove unsuccessful, the administration will probably make the full payment to Perenco to avoid a default," they said.

The government pledged in June 2021 to honour the debt, awarded to Perenco by the World Bank's International Centre for Investment Disputes (ICSID), which ruled Ecuador had unlawfully ended a production-sharing agreement. But Perenco says it has not received any payment.

The Lasso administration recently rejoined ICSID and would want to show it can honour its arbitration rulings as it looks to attract foreign investment, Grais-Targow and Sternberg added.

Ecuador's fiscal standing has improved thanks to higher international oil prices, which could allow it to make the payment in full.

"Nevertheless, that would also eat into the fiscal space the government has to address growing spending demands amid an ongoing dialogue with indigenous leaders," Grais-Targow and Sternberg said.