Venezuela’s Debt and Bond Climate

Distressed-debt investors are deeply divided when it comes to how much bondholders can recover after a Venezuelan restructuring.

Doomsayers argue that a nation suffering Latin America’s worst humanitarian catastrophe has greater concerns than paying investors. Harvard economist Ricardo Hausmann, an informal adviser to U.S.-backed National Assembly leader Juan Guaido, has said creditors must take a gig haircut . Jay Newman, the former hedge fund manager who specializes in distressed debt, has previously said that bonds from state oil giant PDVSA” could be a zero.

Optimists point to a country with the world’s largest proven oil reserves, the likelihood of a big bailout from the International Monetary Fund and foreign investment that could catalyze growth under a new government. With that backdrop, Venezuelan bonds could recover to as high as 80 cents on the dollar, from the current range of 25 to 33 cents, according to Ray Zucaro, the chief investment officer at RVX Asset Management in Miami.

The issue is coming to a head after some of the nation’s $60 billion worth of defaulted debt nearly doubled in price as opponents of President Nicolas Maduro gained momentum in their efforts to oust him, a move investors hope could lead to a favorable restructuring. The opposition has already discussed the possibility of hiring well-known debt attorney Lee Buchheit for an advising role once they take full control of the government.

Trading in notes from Venezuela and PDVSA ground to a halt earlier this month after the Treasury Department imposed rules that forbid U.S. persons from purchasing the securities, limiting the world of potential buyers to overseas hedge funds, sovereign-wealth funds and other entities with no American ties.

But that doesn’t mean all creditors are getting stiffed. Venezuela is paying out those it simply can’t afford not to.

On Tuesday, Venezuela’s opposition-led National Assembly voted to keep afloat the country’s last bond not in default and pay holders of PDVSA’s bonds, due in 2020, the $71m in interest payments owed from late April. While the PDVSA’s ad hoc board, which is now controlled by opposition leader Juan Guaidó’s team, has not indicated how exactly it will finance the lump sum, the country is one step closer to staving off a major capital loss after attaining Congressional approval.

The problem for Venezuela is the PDVSA 2020 debt is backed by a majority stake in Citgo, the PDVSA-owned, but Texas-based, energy business. A missed payment would have opened the doors for creditors to potentially seize Citgo, whose shares also serve as collateral for a $1.5bn loan that Russian oil company Rosneft extended to Venezuela.

It’s not the first time Venezuela has taken drastic measures to protect its Citgo stake. In October the PDVSA board, which was then controlled by beleaguered President Nicolás Maduro, shelled out almost $1bn to cover a principal payment on the debt to avoid losing what has become known as the country’s last-remaining crown jewel.

PDVSA 2020 bondholders are not the only ones getting paid. Maduro has also made a point of servicing its debts to Russia, one of his strongest supporters.

In mid-April, Russia’s Finance Minister announced the Maduro government had forked over more than $100m to cover an interest payment due in March on $3.15bn worth of debt. Another $200m payment is due in the fall.

Venezuela has also made good on its payments to US-based $70bn energy giant ConocoPhillips. An unsurprising move considering last May the oil major gained authorisation to seize the country’s assets in the Caribbean after PDVSA initially refused to pay. In the first quarter of this year, ConocoPhillips disclosed that it had received $147m from PDVSA. The payment was part of a $2bn settlement the oil company was awarded by an International Chamber of Commerce tribunal in April of last year to compensate for the expropriation of several of its projects in 2007.

he payments come at a time when the Maduro government is so strapped for dollars that it will now allow local banks to trade foreign currency, reversing controls that have been in place since 2003.

The policy shift is said to have limited effect with only a fist full of dollars available. Indeed, the central bank was only able to provide $31,875 worth of dollars at a recent auction, as Russ Dallen at Caracas Capital Markets points out. He witheringly notes “that pathetic level of supply is not an anomaly.” On May 3, it provided just under $55,000. The day before? The same.

For context, the dollar-bolívar market was trading some $100m a day just before the foreign currency market was shut down in 2003, per Dallen.

The dollar shortage is only set to worsen given the sad state of the country’s oil industry. Production has already plunged below 800,000 barrels per day, and according to RBC analysts, it could fall to zero by the end of the year.

Whether or not Venezuela will be able to continue selectively paying off important creditors will be tested even if RBC’s forecast fails to come true.