By Jorge Amato
Investment Strategist – Latin America
November 9, 2017
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We believe Maduro’s debt restructuring plans are unlikely to produce agreeable results for bondholders.
Earlier this month, Venezuela’s President Maduro announced the government had instructed the payment of $1.1bn to meet the final maturity of the 2017 Petroleos de Venezuela (PDVSA) bond. He also announced that the government would, through a specially created committee, attempt to refinance and restructure all its external debt. It is now speculated that the government might call for early presidential elections next year. One explanation for the restructuring announcement is that Maduro is using US sanctions as an excuse to politicize the country’s dire fiscal situation in order to bolster his own political support.
Earlier this week, the Russian government reportedly agreed to extend the terms of $3 billion in debt with Venezuela. This should give the country some additional breathing room to continue to pay what will be relatively small bond obligations over the next 6-8 months.
The news thus far has been limited to that statement of intent to refinance and restructure all external debt after paying the 2017 PDVSA bonds as well as the Russian debt extension. Few investors will be surprised the government has finally recognized its inability to pay. However, the timing of the announcement does raise questions.
What is the economic rationale for driving the decision to spend nearly $2bn –a large percentage of liquid government resources - shortly before seeking a restructuring?
What differentiation does the government make between direct government obligations and the PDVSA debt?
US sanctions will be a major stumbling block to restructuring. Sanctions prohibit US investors from purchasing new debt or equity issued by the government of Venezuela or by PDVSA. Even if the government agrees to restructure debt held by non-US investors, it would face challenges by US holders given the ‘pari passu’ clauses embedded in the bonds, which requires equal treatment for all bondholders.
Assuming US sanctions are not an issue, a restructuring proposal would also have to include a sound macroeconomic framework and policy plan to convince investors to exchange their holdings for new instruments. The current state of the Venezuelan economy would require a radical change in policy, direction and external support - maybe from multilateral organizations - to be palatable for investors. This administration lacks the credibility to implement such policies. We believe it will be very difficult for Maduro to reach and convince bondholders to restructure.
We believe that the current scenario is unlikely to produce rapid or agreeable results for bondholders. US sanctions, cross default clauses, lack of credible government or policy framework, complex and varied bond clauses, and risks of attachment all promise to make this a long and messy affair. Further downside for asset prices and deterioration of macroeconomic fundamentals along with social stress are likely to follow in the coming months.
Venezuela is not part of Global Investment Committee taxonomy so we have avoided any type of direct exposure to this credit. It has not been part of our asset allocation process.
For bondholders, the situation remains fluid and new announcements could come out soon. Signposts we are looking for in the coming days are:
- Amortization payments, which were promised last Friday and do not have grace periods remain unpaid. Market players have not come to a consensus as to whether CDS contracts should trigger a credit event. November 13th marks the end of the grace period for coupon payments that are currently late for both Venezuela and PDSA bonds. It will be interesting to see in the case that payments are not made whether or not they prioritize one issuer over the other.