On Thursday, at a raucous gathering of loyal supporters inCaracas, President Nicolas Maduro made official what the bondmarket had been anticipating for years: cash-strapped Venezuela isgoing to seek debt relief.

Blaming the financial sanctions imposed by the U.S.government—and its “lackeys” in the Venezuelan opposition wholobbied for such measures—Maduro said that a $1.1 billion principalpayment on bonds from state-run oil company PDVSA that was dueThursday will be the last one made before the countrybegins negotiations with creditors.

“Venezuela has had to face a genuine financial blockade,” Madurotold the crowd in a fiery, speech broadcast on national televisionthat lasted more than an hour.

Maduro seemed confused by the bond market's terminology and, inturn, wound up leaving traders perplexed as to his exact intent.One second, he was calling for a “refinancing,” a word that impliesa routine, market-friendly transaction, and the very next for a“restructuring,” a term more generally associated with coercivegovernment action that imposes losses on creditors and is typicallylabeled a default. He didn't say if the country will make otherdebt payments that are coming due in the next weeks.

Finance Ministry officials didn't reply to messages seekingclarification last night.

The market has, in reality, been prepared for a call from Maduroto restructure the debt for a long time. Having watched theoil-rich country sink ever deeper into economic chaos under thesocialist leader's authoritarian rule, traders have driven down theaverage price of the government's foreign bonds to just 36 cents onthe dollar.

Still, the talks figure to be messy, and Friday morning's marketreaction reflected those jitters. Some government and PDVSA bondssank as much as six cents on the dollar.

Sanctions imposed in August by the U.S. have made it difficultto raise money from international investors, and effectivelyprohibit refinancing or restructuring existing debt by blockingU.S.-regulated institutions from buying new bonds. In additionto all the overseas notes, Venezuela owes billions of dollars inawards resulting from international arbitration disputes and toprivate companies with cash trapped in the country, while PDVSA andits subsidiaries have a slew of outstanding loans.

It's an unprecedented situation for bondholders, who havelimited recourse as long as sanctions are in effect.

“This promises to be as complex a restructuring exercise as I'veseen in my more than 30 years of experience in this market,” saidHans Humes, the chief executive officer of emerging-markets hedgefund Greylock Capital Management.

That Maduro opted to fork over the $1.1 billion today—a huge sumof money in a nation that's down to just $10 billion inhard-currency reserves—to make good on the Petroleos de Venezuelabonds indicates how wary officials are in Caracas of having the oilcompany ensnared in the restructuring talks. It also triggeredspeculation among some investors that Maduro is planning onexcluding PDVSA from the restructuring.

Through PDVSA, Venezuela—home to the world's largest petroleumreserves—has offshore refineries and oil receivables. PDVSA's U.S.refining arm, Citgo Holding Inc., has also been used as collateralto back some bonds. And if creditors start going after Venezuela'soil assets, buyers of its crude are apt to turn to other sources,depressing not only demand but the price of Venezuela's maintreasure.

At least so far, Venezuela's announcement isn't having aknock-on effect on other emerging-market assets. Analysts said thecountry's situation was unique, and not a sign of broader problemsamong developing nations.

The decision to seek a restructuring is a step that Maduro andhis late predecessor, Hugo Chavez, rejected for two decades—defyingpessimistic Wall Street analysts and making the nation's debt oneof the more profitable trades in emerging markets. Maduro now seemsto be acknowledging that the heavy debt load for the oil exportingnation has become unsustainable amid a drop in crude output andprices, as well as the financial sanctions.

It's “going to be ugly for holders,” said Ray Zucaro, chiefinvestment officer at Miami-based RVX Asset Management, which holdsthe PDVSA bonds that matured Thursday. “There's no real way tosugar coat.”

While notes due in 2027 have plunged from about 50 cents on thedollar a year ago to 38.7 on Thursday, securities maturing nextyear have been trading at about 65 cents.

Even after the oil producer known as PDVSA made an $842 millionprincipal payment Oct. 27, the nation is behind on about $800million of interest payments. All told, there's $143 billion inforeign debt owed by the government and state entities, with about$52 billion in bonds, according to Torino Capital.

Vice President Tareck El Aissami, one of the individualstargeted in the sanctions, was named head of bond restructuringefforts. Earlier this year, the Treasury Department alleged that ElAissami—who was elevated to his post in January—protected druglords and oversaw a network exporting thousands of kilograms ofcocaine. The acting finance minister, Simon Zerpa, who is also theCFO of PDVSA, has also been sanctioned.

The U.S. has also accused the Maduro government of human rightsviolations and undermining democracy, and President Donald Trumpcalled the turmoil there—with more than 100 lives lost in streetprotests earlier this year— “a disgrace to humanity.”

Maduro made the announcement in a televised address in which heemphasized that Venezuela has always honored its obligations, andhad the money to continue doing so, but was being hampered by thefinancial penalties the U.S. imposed.

Throughout the broadcast, Maduro kept Wall Street viewers on theedge of their seats by teasing an upcoming “historic announcementon debt,” then spending a half hour touting new ambulances andpublic roads as he waited for the international media to tunein.

His announcement left viewers confused as to why the governmentwould opt to restructure after making two large bond payments,money that presumably could have been used to buy medications andother supplies in shortage.

“It makes no sense,” said economist Asdrubal Oliveros, thedirector of the Caracas consultancy Ecoanalitica.

The Institute of International Finance will hold a call forcreditors Friday to discuss Maduro's plan, according to an email toinvestors seen by Bloomberg.

There are plenty of Venezuela watchers—including economists suchas Ricardo Hausmann —who have been urging the government to stopbond payments and seek aid from lenders like the InternationalMonetary Fund. They say sending dollars to investors while cuttingback on imports of food, medicine and basic goods for theVenezuelan people is immoral.

Venezuela's decision to stay current on its debt has confoundedsocialists and capitalists alike, but it probably boils down to therisk that Venezuela's international oil assets could get seized bycreditors or tied up in court.

Thanks to Maduro's gross mismanagement, Venezuela is sufferingone of the worst economic collapses in modern Latin Americanhistory. Its economy contracted 10% last year while the IMF expectsannual inflation to hit more than 2,000% next year. Socialistrevolutionaries who came to power in 1999 vowing to raise up thepoor and bring down the corrupt elite have driven the poverty rateto 82% and looted billions of dollars. International reserves havesunk to near a 15-year low.

Because Venezuela isn't current with most of its key economicstatistics, the most basic data an investor would use to gauge thecountry's creditworthiness haven't been made available. Still,credit default swap traders placed the implied probability of aVenezuelan default at 97% over the next five years.

“There's a bad scenario, which has essentially happened now, inwhich the regime defaults, there's no change in regime and with thesanctions there's no restructuring,” Gorky Urquieta, who helpsmanage $15 billion in emerging-market debt at Neuberger Berman,said. “The whole idea of recovery value takes on a whole newmeaning, and there's not much bondholders will be able to do.”

From: Bloomberg News

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