Ecuador recovery set at 31.375% in first sovereign CDS auction

The recovery rate for government bonds issued by the Republic of Ecuador was set at 31.375% today, in an auction to cash-settle sovereign credit default swap (CDS) contracts linked to the country's debt.

Ecuador is expected to default on at least some of its sovereign bonds and missed a $30.6 million interest payment in November last year, triggering sovereign CDSs linked to it.

The outcome of the auction means market participants that bought CDS protection on Ecuador and opt for cash-settlement will receive 68.625% of par.

There has been a ream of similar auctions to settle CDS and loan CDS trades based on corporates over recent months, although the Ecuador auction is the first ever to have been used to cash-settle sovereign CDSs.

It is also the first to cash-settle any emerging market reference entity, according to New York-based broker Creditex and London-based data provider Markit, which jointly administer the electronic auctions.

The auction process entails dealers anonymously submitting two-way tradable prices for the defaulted underlying debt. Outliers are stripped from the results, while banks are penalised for overly-aggressive pricing.

In all, 12 major dealers participated in the auction.

See also: Isda prepares to settle Ecuador CDS