(Bloomberg) -- A bid to block a $17.4 billion debt restructuring by Ecuador has come down to the wire in a court battle between the beleaguered South American nation and two U.S. investment firms, including one co-founded by the legendary money manager Jeremy Grantham.
GMO, the Boston-based firm Grantham helped start, and Contrarian Capital Management LLC, a Greenwich, Connecticut-based hedge fund, asked U.S. District Judge Valerie Caproni in Manhattan on Wednesday to block the debt restructuring, which offers investors 91 cents on the dollar, calling it “coercive in the extreme.”
The firms said Ecuador, which embarked on a debt-sale spree in 2014 to offset a decline in the price of oil, its main export, defrauded investors in a press release about its tender and exchange offer.
In a telephone conference before the judge on Thursday, a lawyer for Ecuador argued that a delay or failure of the restructuring plan could lead to a “massive, cascading default” for the country, which has been hard hit by the coronavirus pandemic.
As the hearing drew to a close, Caproni told both sides to file more legal arguments by 8 a.m. Friday, just hours before a deadline for investors to decide whether to sign on to the deal. After the conference, Ecuador agreed to postpone the deadline to Monday at 11 a.m. Caproni set another court conference for this Friday at 2:30 p.m.
At one point in the session, Christopher Clark, a lawyer for Contrarian and GMO, argued that the tender offer unfairly penalizes investors that don’t agree to the pact. Caproni expressed skepticism of the argument that Ecuador misled investors and that the offer is coercive.
“Tell me how they are compelling consent,” the judge said. “They are incentivizing consent.”
Read More: Grantham Sounds Bearish Warning With GMO Cutting Exposure
Ecuador’s Finance Ministry said Wednesday night by text message that the country’s lawyers would fight “this baseless action by funds with a minimal position.” The government “is firmly opposed to these funds trying to obtain additional economic benefits above what was negotiated in good faith with the majority of its biggest creditors,” the ministry said.
Contrarian has said in a court filing that it holds “hundreds of millions of dollars” of the debt. GMO has said it holds more than $100 million.
Ecuador’s mounting financial trouble led the country to sign a $4.2 billion funding agreement with the International Monetary Fund in early 2019. Its debt woes were only exacerbated by the pandemic. The dispute with bondholders became public on July 20 after Ecuador requested their consent for its proposal by July 31. A group of institutional investors advised by BroadSpan Capital LLC and UBS Group AG quickly rejected the restructuring bid, citing their offer of $600 million in funding at below-market rates to secure a deal.
Ecuador has called that proposal too expensive and is sticking to its request for almost no interest payments through 2021. The IMF and other multilateral organizations support Ecuador’s offer, and holders of more than 53% of the bonds have already accepted the terms, according to the government.
The terms include a cut in capital of $1.54 billion, a reduction in the average interest rate to 5.3% from 9.2% and an extension of average maturities to 12.7 years from 6.1 years.
Contrarian and GMO say Ecuador falsely claimed the offer isn’t coercive, was reached through a transparent process and complies with contractual promises it made to investors. The false statements amount to securities fraud under U.S. law, they claim.
Ecuador argues that the parties agreed to submit any disputes to arbitration in London and that Caproni’s court lacks jurisdiction to hear the case. It says its statements are accurate and that Contrarian and GMO are sophisticated investors that wouldn’t have been misled in any case.
The case is Contrarian Emerging Markets LP v. Republic of Ecuador, 20-cv-05890, U.S. District Court, Southern District of New York (Manhattan).
(Adds latest scheduling in fifth paragraph.)
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