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No default risk in Venezuela despite protests

Feb 18, 2014

Yields on Venezuelan debt have increased amid the country’s political unrest, yet the country is unlikely to stop paying its international bonds, say analysts

     
     
   Photo: andresAzp  
Violent protests that have hit Venezuela’s major cities and left four people dead have not changed the outlook for the country’s sovereign bonds, analysts said this week.

The borrower, rated Caa1/B-/B+, is unlikely to default on its debt as long as oil prices stay high, said Bulltick analysts.

"Default would counterproductively increase the current economic havoc," they said in a research note. "After the sell-off, which has seen Venezuela 2027 yields reach new highs, we think it an inopportune moment to unload bonds. Unless oil prices see a precipitous collapse, (not our forecast) we expect Venezuela to continue to service its debt obligations."

Bank of America Merrill Lynch analysts took a similar view. "Investors have been selling bonds across the curve amid the high levels of uncertainty, but the short end bonds have been penalized excessively, as price and jump to default risk instead of yield become the main drivers," they said in a research note.

"We find some attractive valuations in the short end out to 2017 as we believe short-term capacity of payment remains relatively strong."

Four people have been reported dead in a series of protests that have rocked Venezuela in recent weeks.

Bulltick cited yields on the sovereign’s 2027 bonds at 15.9% on Tuesday. CDS referencing Venezuela jumped 89bp the same day, trading at 1,698bp by mid-afternoon. It had changed hands at 1,147bp at the start of the year, according to data from Markit.

Meanwhile, Venezuela’s exchange rate is coming under increasing pressure and markets are waiting to see form of a new series of currency auctions. The last auction sold dollars for VEF11.7, although Bulltick put the black market rate at VEF87 to the dollar.

The government is expected to introduce a second auction framework to supply dollars to the private sector. That is likely to sell dollars for VEF25 to VEF30 apiece, BofA-Merrill forecast. LF



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