Venezuela Is Seeking Debt Relief

President's televised announcement confuses bondholders.

On Thursday, at a raucous gathering of loyal supporters in Caracas, President Nicolas Maduro made official what the bond market had been anticipating for years: cash-strapped Venezuela is going to seek debt relief.

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

“Venezuela has had to face a genuine financial blockade," Maduro told the crowd in a fiery, speech broadcast on national television that lasted more than an hour.

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

Finance Ministry officials didn’t reply to messages seeking clarification last night.

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

Still, the talks figure to be messy, and Friday morning’s market reaction reflected those jitters. Some government and PDVSA bonds sank as much as six cents on the dollar.  

Sanctions imposed in August by the U.S. have made it difficult to raise money from international investors, and effectively prohibit refinancing or restructuring existing debt by blocking U.S.-regulated institutions from buying new bonds. In addition to all the overseas notes, Venezuela owes billions of dollars in awards resulting from international arbitration disputes and to private companies with cash trapped in the country, while PDVSA and its subsidiaries have a slew of outstanding loans.

It’s an unprecedented situation for bondholders, who have limited recourse as long as sanctions are in effect.

“This promises to be as complex a restructuring exercise as I’ve seen in my more than 30 years of experience in this market,” said Hans Humes, the chief executive officer of emerging-markets hedge fund Greylock Capital Management.

That Maduro opted to fork over the $1.1 billion today—a huge sum of money in a nation that’s down to just $10 billion in hard-currency reserves—to make good on the Petroleos de Venezuela bonds indicates how wary officials are in Caracas of having the oil company ensnared in the restructuring talks. It also triggered speculation among some investors that Maduro is planning on excluding PDVSA from the restructuring.

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

At least so far, Venezuela’s announcement isn’t having a knock-on effect on other emerging-market assets. Analysts said the country’s situation was unique, and not a sign of broader problems among developing nations.

The decision to seek a restructuring is a step that Maduro and his late predecessor, Hugo Chavez, rejected for two decades—defying pessimistic Wall Street analysts and making the nation’s debt one of the more profitable trades in emerging markets. Maduro now seems to be acknowledging that the heavy debt load for the oil exporting nation has become unsustainable amid a drop in crude output and prices, as well as the financial sanctions.

It’s “going to be ugly for holders,” said Ray Zucaro, chief investment officer at Miami-based RVX Asset Management, which holds the PDVSA bonds that matured Thursday. “There’s no real way to sugar coat.”

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

Even after the oil producer known as PDVSA made an $842 million principal payment Oct. 27, the nation is behind on about $800 million of interest payments. All told, there’s $143 billion in foreign 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 individuals targeted in the sanctions, was named head of bond restructuring efforts. Earlier this year, the Treasury Department alleged that El Aissami—who was elevated to his post in January—protected drug lords and oversaw a network exporting thousands of kilograms of cocaine. The acting finance minister, Simon Zerpa, who is also the CFO of PDVSA, has also been sanctioned.

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

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

Throughout the broadcast, Maduro kept Wall Street viewers on the edge of their seats by teasing an upcoming “historic announcement on debt,” then spending a half hour touting new ambulances and public roads as he waited for the international media to tune in.

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

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

The Institute of International Finance will hold a call for creditors Friday to discuss Maduro’s plan, according to an email to investors seen by Bloomberg.

There are plenty of Venezuela watchers—including economists such as Ricardo Hausmann —who have been urging the government to stop bond payments and seek aid from lenders like the International Monetary Fund. They say sending dollars to investors while cutting back on imports of food, medicine and basic goods for the Venezuelan people is immoral.

Venezuela’s decision to stay current on its debt has confounded socialists and capitalists alike, but it probably boils down to the risk that Venezuela’s international oil assets could get seized by creditors or tied up in court.

Thanks to Maduro’s gross mismanagement, Venezuela is suffering one of the worst economic collapses in modern Latin American history. Its economy contracted 10% last year while the IMF expects annual inflation to hit more than 2,000% next year. Socialist revolutionaries who came to power in 1999 vowing to raise up the poor and bring down the corrupt elite have driven the poverty rate to 82% and looted billions of dollars. International reserves have sunk to near a 15-year low.

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

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

 

Bloomberg News

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