Venezuela Bond Traders Only Care About Oil as Correlation Jumps

  • Slump in dollar notes surpasses slide in emerging-market debt
  • Maduro's China loan announcement overshadowed by crude tumble

The price of oil is increasingly all that matters to Venezuela’s bond investors.

President Nicolas Maduro said Sept. 1 the cash-strapped country would get a fresh $5 billion loan from China. Yet Venezuela’s dollar notes have slumped an average 1.7 percent, almost eight times the average loss in emerging markets. Crude’s 7.2 percent plunge has completely overshadowed the announcement.

The correlation between Venezuela’s bonds and oil prices is now the highest among the world’s 15 biggest crude-producing countries as investors ratchet up bets Maduro’s government will run out of money to pay debt. The nation’s dollar notes actually climbed an average 13.8 percent when crude gained at the end of August, only to tumble again when the rally fizzled out. 

If oil prices don’t recover, “it becomes almost a certainty” that Venezuela will face a credit event such as an outright default or pushing out maturities, Gorky Urquieta said by phone from Atlanta. He helps manage $6.1 billion of emerging-market debt, including Venezuela bonds, at Neuberger Berman.

The monthly correlation between Venezuela’s bonds due in 2022 and West Texas Intermediate oil has jumped to 0.64 percent, data compiled by Bloomberg show. A reading of 1 would mean the assets are moving in lockstep, while minus 1 means they’re going in opposite directions.

The bonds of fellow oil-producing nations Russia and Nigeria had a correlation to oil of less than 0.4 percent.

Venezuela, a founding member of the Organization of Petroleum Exporting Countries, depends on crude for 95 percent of its export revenue, so it’s scouring the globe in search of funds. The nation and its state-owned oil company, Petroleos de Venezuela SA, have $5.8 billion in interest and foreign-debt bond principal due this year, with an additional $10.8 billion coming due in 2016, data compiled by Bloomberg show.

Traders are signaling there’s a 63 percent chance Venezuela will default by September 2016, compared with a 54 percent probability three months ago, based on credit-default swaps.

After a surprise visit to Beijing, Maduro unveiled the signing of the China loan, which will help finance an increase in production, according to a statement posted on the Venezuelan Information Ministry website.

The Information Ministry didn’t respond to an e-mailed request for comment on the nation’s ability to honor debt.

The loans from China don’t give bond investors much solace as they’re tied to specific projects, said Asdrubal Oliveros, director of the Caracas-based consulting company Econanalitica.

“Those funds from China are neutral” for debt holders, he said by phone.

Maduro also traveled to Doha on Sept. 4 to push for higher oil prices. Venezuela wants to see crude return to at least $70 a barrel, Maduro said recently. The benchmark price rose 3.4 percent to $45.65 a barrel at 12:53 p.m. on the New York Mercantile Exchange, down 51 percent in the past year.

For each dollar that oil declines on average, Venezuela loses about $700 million in revenue, according to Econanalitica’s Oliveros.

“We’re in an oil-price war,” he said. “It’s worrying times for bondholders because Venezuela’s vulnerability is huge.”

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