ICBC Standard Bank’s participates in $237.6 million repo agreement with Government of Ecuador in 2019

ICBC Standard Bank’s participates in $237.6 million repo agreement with Government of Ecuador in 2019 On August 28, 2018 the Government of Ecuador, represented by the Ministry of the Economy and Finance, and Goldman Sachs International (GSI) entered into a master repurchase (‘repo’) agreement under which the Government of Ecuador sold and transferred to GSI a nominal amount of notes of $1,201,616,000 issued by the Government of Ecuador and in return received from GSI a purchase price of $500,000,000, the value of the Government of Ecuador’s residual interest in the repurchase agreement, and the periodic payment by GSI of amounts equal to the periodic interest amounts on these notes.

The master repurchase agreement was governed by English law and based upon the standard Global Master Repurchase Agreement published by the International Securities Market Association, together with a negotiated annex (the "GSI-Ecuador GMRA") and a confirmation (the "August 2018 Repo Confirmation", collectively with the GSI-Ecuador GMRA, the "August 2018 GSI-Ecuador Repurchase Agreement").

Under the terms of repurchase agreement, upon the scheduled amortization dates, the Government of Ecuador is required to pay amounts in installments to GSI which in the aggregate equal the amount originally paid as the purchase price to GSI.

On the scheduled repurchase date, 48 months from the commencement of the repurchase agreement, GSI is required to sell and transfer to the Government of Ecuador the equivalent property to the original series of notes, transferred against payment by the Government of Ecuador of the final installment of the repurchase price, provided that certain events of default relating to the Government of Ecuador have not occurred.

The repurchase agreement provides that the repo counterparty has the right to sell or otherwise dispose of its ownership interest on these notes, although the repo counterparty has agreed that it will continue to maintain economic exposure to the issued notes during the pendency of the repurchase agreement except in the case of an event of default by the Government of Ecuador.

Under the terms of the repurchase agreement, the Government of Ecuador will repurchase the notes for a price consisting of the amount originally received together with interest agreed as 90-day LIBOR plus 425 basis points, or approximately 6.55%, a savings of approximately 30% compared with the 9.63% yield on the sovereign bond due in 2022.

The Government of Ecuador agreed to classify the notes issued as a contingent liability for accounting purposes in its regular debt reports, and the purchase price received was to be classified for accounting purposes as public indebtedness.

The repurchase agreement was approved by the Government of Ecuador’s Debt and Finance Committee on August 25, 2018, and the transaction fell within the debt-raising parameters contemplated in the annual fiscal planning goals approved by the National Assembly in the Government of Ecuador’s 2018 budget.

The 2018 repurchase transaction sought to increase Government of Ecuador’s short-term liquidity. It was collateralized against a set of sovereign bonds that the Government of Ecuador issued on an ad hoc basis.

On October 10, 2018, the Government of Ecuador and GSI amended and restated the August 28, 2018 repurchase transaction to decrease the price differential spread payable by the Government of Ecuador by 135 basis points (as compared to the price differential spread payable by the Government of Ecuador under the August 28, 2018 repurchase transaction), in exchange for the Government of Ecuador repaying the purchase price in euro based on an agreed upon exchange rate, although the purchase price was disbursed in US dollars.

In accordance with the substitution provisions set out in the amended and restated August 2018 GSI-Ecuador Repurchase Agreement (as amended and restated, the "Amended August 2018 GSI-Ecuador Repurchase Agreement") and pursuant to a notice of substitution dated May 23, 2019, on May 29, 2019: (a) $701,616,000 nominal amount of the August 2018 Additional Notes (comprised solely of 2020 Notes), which had a market value at the date of the notice of substitution of approximately $733.67 million (the "Substituted August 2018 Additional Notes") were returned to the Government of Ecuador by GSI; and (b) $688,268,000 nominal amount of notes of the Government of Ecuador due 2023 with a coupon of 8.750% (with a market value at the date of the notice of substitution of approximately $733.67 million) were transferred to GSI by the Government of Ecuador.

On May 29, 2019, the Government of Ecuador cancelled the Substituted August 2018 Additional Notes.

Then, on May 31, 2019, the Government of Ecuador, GSI and ICBC Standard Bank Plc (ICBCS) entered into an agreement pursuant to which a portion of GSI's interest in the Amended August 2018 GSI-Ecuador Repurchase Agreement was transferred to ICBC Standard Bank Plc.

As a result of a decline in the valuation of the 2022 Notes and the 2023 Notes, GSI made four requests under the Amended August 2018 GSI-Ecuador Repurchase Agreement from November 19, 2019 to November 22, 2019 for the Government of Ecuador to transfer additional payment amounts totaling $167,814,563.08.

These payments were made between November 21, 2019 and November 26, 2019.

After the recovery of the value of the 2022 Notes and the 2023 Notes, these additional payment amounts were returned in full to the Government of Ecuador upon its request.

In April 2020, the Government of Ecuador delivered to GSI an Accelerated Repurchase Notice, pursuant to which GSI returned to the Government of Ecuador 2022 Notes with a nominal value of $400,000,000 and 2023 Notes with a nominal value of $550,614,000, collectively constituting the entirety of the notes delivered to GSI pursuant to the GSI Repo Transaction, and the GSI Repo Transaction and the GSI-Ecuador Repurchase Agreement were terminated.

Following receipt, the Government of Ecuador promptly cancelled such notes and they are no longer outstanding.

In April 2020, the Government of Ecuador also delivered to ICBCS an Accelerated Repurchase Notice pursuant to which (i) ICBCS returned to the Government of Ecuador 2022 Notes with a nominal value of $100,000,000 and 2023 Notes with a nominal value of $137,654,000, collectively constituting the entirety of the notes delivered to ICBCS pursuant to the ICBCS Repo Transaction, (ii) the Government of Ecuador paid ICBCS a return amount of $294,116.23, and (iii) the ICBCS Repo Transaction and the ICBCS-Ecuador Repurchase Agreement were terminated.

As a result of a decrease in value of the underlying notes, upon requests by ICBCS pursuant to the agreement, the Government of Ecuador transferred to ICBCS additional payments totaling a net amount of $72.2 million (after deducting those additional payments returned by ICBCS to the Government of Ecuador) between November 2019 and April 2020.

Following receipt of the notes from ICBCS, the Government of Ecuador promptly cancelled such notes and they are no longer outstanding.

The IMF and World Bank have criticized the Government of Ecuador for its participation in this over-collateralized repo transaction.

According to a 2023 guidance note (entitled "Collateralized Transactions: Key Considerations for Public Lenders and Borrowers") from the IMF and World Bank, "[I]n 2018, Ecuador issued four-year repos with Goldman Sachs and Credit Suisse to cover funding gaps during difficult financial conditions. The transactions involved over-collateralizing the amount borrowed with bonds never included in public debt statistics.

The amount of bonds pledged was US$ 2.4 billion against US$ 1 billion received.

Although the repo interest rates were over 300 [basis points] below Eurobond market rates at the time, Ecuador saw the true costs of the repos rise due to margin calls linked to the marking-to-market of the financial collateral.

In May 2020, Ecuador agreed to repay the full repo, so these securities were not included in the eventual restructuring with commercial creditors, but the repayment reduced the country’s foreign exchange reserves."