Investors scramble as Venezuela announces debt restructuring

Investors scramble as Venezuela announces debt restructuring

Bonds Fixed Income Venezuela

Venezuelan President Nicolás Maduro announced the country plans to restructure its external debt obligations, leaving investors puzzled after the state-owned oil company PDVSA said it will make its latest round of bond payments.

Venezuela’s 2018 bonds fell $0.16 to $0.63 on the dollar after Maduro’s announcement on Thursday, while PDVSA's 2027 notes were spotted at $0.20 on the dollar.

"It was just a matter of time," said one fixed-income investor. "They couldn't keep this up for much longer."

US-based bondholders are concerned about how they can participate in the restructuring talks, after the US government barred US financial institutions from dealing new bonds or providing new loans to the Venezuelan government in August.

"There were rumors that the sovereign was considering a debt restructuring, but the US sanctions put those to bed at the time," a second fixed-income investor said. 

"Any talks will be difficult, but as of now, it looks like US bondholders can't be seated at the table," he said. 

A restructuring, which likely involves around $90bn in debt, "is going to be a long process," the first investor said.

Maduro appointed Vice President Tareck El Aissami to lead the committee charged with restructuring and refinancing the government’s external debt. The US government imposed sanctions on El Aissami in February for alleged links to drug trafficking.

Markets sources also said they are unclear if Venezuela wants to refinance or restructure its debt. Maduro used both terms in a speech on Thursday.

"At this point, there are too many doubts to draw any good conclusions," a third fixed-income investor said.

Both Venezuela’s sovereign notes and PDVSA’s bonds contain cross default clauses, which stipulate that the government or PDVSA are in default on all their dollar bond obligations if they miss a payment of more than $100m, said Edward Glossop, an economist at the UK consultancy Capital Economics. PDVSA has a $135m bond payment due on November 15.

"Even if the US lifts financial sanctions amid pressure from US bondholders, we're highly skeptical that the Venezuelan government can table a credible restructuring offer," Glossop said in a report.

Maduro said PDVSA has initiated $1.12bn in principal and interest payments on its 2017 bonds. Venezuela has made $71.7bn in external debt payments in the past four years, he said.

Ratings hit

Fitch Ratings downgraded Venezuela's rating to C from CC after authorities said they intended to pursue a renegotiation of sovereign external debt obligations. The rating agency said Venezuela's external liquidity was weak before the announcement with a liquidity ratio near 33%. Gross international reserves have decliend further in 2017, falling nearly $1bn in the year through November to roughly $10bn.

Moody's said in a report that its Caa3 rating and negative outlook incorporated a "very high" risk of a debt restructuring. The rating agency also anticipates US sanctions to complicate negotiations with bondholders and may incur significant losses in the event of a prolonged restructuring.

In regards to PDVSA, Moody's said the oil company's aggravated payment problems in the last week highlighted its high liquidity risk. Production has also been in decline and company assets have lost value.