From Bloomberg
President Nicolas Maduro said Venezuela will seek to restructure its global debt after the state oil company makes one more payment, blaming U.S. sanctions for making it impossible to find new financing.
The government will transfer funds for a $1.1 billion principal payment on Petroleos de Venezuela bonds that came due Thursday, Maduro said from Caracas. From there on out, the nation will renegotiate its debt with banks and investors, he said in a national address. Bonds of the state oil company and government notes maturing next year slumped in London trading on Friday.
It’s a step that Maduro and his late predecessor, Hugo Chavez, rejected for two decades — defying Wall Street analysts in recent years as cash drained from the government’s coffers, and making the nation’s debt one of the more profitable trades in emerging markets. By seeking a restructuring, Maduro is 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. He didn’t say if the country will make other debt payments that are coming due in the next weeks, creating a degree of confusion among investors.
It’s “going to be ugly for holders,” said Ray Zucaro, the 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.”
Bonds Fall
Prices on PDVSA’s $3 billion of bonds maturing in 2027 were quoted at 20 cents on the dollar at 9:23 a.m. in London, according to pricing source CBBT. Venezuelan government bonds maturing in 2018 slid 16 cents on the dollar to 63 cents, while longer-maturity debt was little changed.
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.
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, because they block U.S.-regulated institutions from buying new bonds. It’s an unprecedented situation for bondholders, who have limited recourse as long as sanctions are in effect.
“I decree a refinancing and restructuring of external debt and all Venezuelan payments,” Maduro said. “We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country.”
Human-Rights Violations
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 U.S. has accused the Maduro government of human-rights violations, and President Donald Trump called the turmoil there — with more than 100 lives lost in street protests earlier this year — “a disgrace to humanity.” The regime’s sweeping victories in October’s gubernatorial elections have been marred by fraud accusations.
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. Some analysts even raised the idea that perhaps Maduro was confused about bond terminology and didn’t mean to say that he plans on restructuring the debt. Others speculated he plans on excluding PDVSA from the process.
“It makes no sense defaulting while paying tomorrow,” said economist Asdrubal Oliveros, the director of the Caracas consultancy Ecoanalitica.
Enormously Complicated
Attorneys and investors say a restructuring of all Venezuelan debt would be enormously complicated, even if sanctions are lifted at some point. Creditors will have to figure out a sustainable repayment plan for the government and possibly PDVSA. Fights between creditors will be inevitable as they sort out who’s entitled to what. In addition to all the bonds, 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.
“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.
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.
Oil Assets
There are plenty of Venezuela watchers — including economists such as Ricardo Hausmann — who have been urging the government to stop payments on its bonds and to seek aid from lenders like the International Monetary Fund. They say the debt load is unsustainable, and sending dollars to foreign 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.
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.
Thanks to Maduro’s gross mismanagement, Venezuela is suffering one of the worst economic collapses in modern Latin American history. Its economy contracted 19 percent last year, according to its central bank, while the IMF expects annual inflation to hit more than 2,000 percent next year. A socialist revolution that came to power in 1999 vowing to raise up the forgotten poor and bring down the corrupt elite has driven the poverty rate to 82 percent of the population and has itself looted billions of dollars. International reserves have sunk to a 15-year low near $10 billion.
Currency Controls
After surviving a coup in 2002, former president Chavez imposed currency controls limiting the amount of dollars that individuals could buy or what companies could purchase for imports. As the black market exchange rate widened from the official rate, he eventually began to use bond sales as a means to alleviate the demand for hard currency and mop up excess liquidity in bolivars. He achieved that by selling dollar-denominated notes to locals in bolivars. They then sold them abroad to foreign investors.
“The one who created this monster of debt is the government, during the time of the highest oil income ever,” said Julio Borges, the president of the opposition-led National Assembly.
Even with oil revenue pouring in at a record clip, Chavez began to sign long-term lending programs with China. The deals consisted of China delivering billions in cash for infrastructure and social programs while Venezuela pledged future oil deliveries.
Export Strain
While the short-term influx of money helped Chavez bankroll various projects, over time the strain of exporting hundreds of thousands of barrels to pay back the loans took its toll. In addition, investment in exploration and production has dried up after prices tanked and output is currently below 2 million barrels a day, down by more than a third in the past 15 years.
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 percent 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 by phone from Atlanta. “The whole idea of recovery value takes on a whole new meaning, and there’s not much bondholders will be able to do.”
Continued Events
From Bloomberg
One day after President Nicolas Maduro left traders puzzled by pledging to both refinance and restructure Venezuela’s foreign bonds, his chief debt negotiator only added to the confusion.
Tareck El Aissami, the country’s vice president, chose yet another term as he spoke Friday — “renegotiate” — to describe the government’s plans while simultaneously saying bond payments would continue to be made.
A renegotiation generally connotes a hard-line restructuring that sticks creditors with steep losses, but the pledge to keep making payments implies a less-confrontational approach. El Aissami went on to invite investors to meet him in Caracas for talks Nov. 13, an encounter that almost certainly won’t happen because of U.S. sanctions against the government and against El Aissami in particular (the Treasury Department has labeled him a drug kingpin).
“The way in which this has been handled does not give confidence that refinancing or restructuring talks will start smoothly nor that there will be a quick solution,” Stuart Culverhouse, the head of macro and fixed income research at Exotix, said in emailed comments. “It is not really clear what the government intends, nor whether it can do anything at all with U.S. sanctions in place.”
In any event, the bond market is none too thrilled with the developments, even if investors had been anticipating some attempt at debt relief in cash-strapped Venezuela for years. Securities slumped nearly across the board Friday, with some of the country’s higher-priced bonds falling as much as 18 cents on the dollar. Many are now trading below 30 cents, and Bank of America Corp. strategists said prices may go as low as 20 cents.
Blaming the financial sanctions imposed by the U.S. government — and its “lackeys” in the Venezuelan opposition who lobbied for such measures — Maduro announced late Thursday that a $1.1 billion principal payment on bonds from state-run oil company PDVSA that was due that day will be the last one made before the country begins talks with creditors.
Maduro instigated the confusion in his speech Thursday, when he mixed up bond market terminology, one second calling for a “refinancing” — a word that implies a routine, market-friendly transaction, and the next for a “restructuring,” a term more generally associated with coercive government action that imposes losses on creditors.
Finance Ministry officials didn’t reply to messages seeking clarification.
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 get ensnared in a messy default. While it had triggered speculation among some investors that Maduro was planning on excluding PDVSA from the restructuring, El Aissami was clear that the oil company’s debt would be included.
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 effecton 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.
While governments typically become unstable and often fall after a default, that assumption shouldn’t be made about the Maduro regime, which has been consolidating its power, said Mitu Gulati, a law professor at Duke University who focuses on sovereign debt.
“This is indeed — best I know — a unique situation,” said Mitu Gulati, a law professor at Duke University who focuses on sovereign debt. “There has been no other situation, at least in my memory of restructurings, where sanctions have been imposed specifically to prevent or hinder a restructuring in order to help overthrow a sitting government.”
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.
It’s “going to be ugly for holders,” said Ray Zucaro, the 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.”
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 PDVSA’s chief financial officer, has also been sanctioned.
The U.S. has 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.”
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.
Thanks to Maduro’s gross mismanagement, Venezuela is suffering one of the worst economic collapses in modern Latin American history. Its economy contracted 10 percent last year while the IMF expects annual inflation to hit more than 2,000 percent 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 percent and looted billions of dollars. International reserves have sunk to near a 15-year low.
