Venezuela’s Bonds Propelled by Speculation PDVSA Is Eyeing Swap

  • PDVSA notes due April 2017 have risen 5.3 cents this week
  • Swap rumors fuel rally as country nears constitutional crisis

Venezuela’s bonds are soaring on speculation the government may be looking to strike a deal to push back looming debt maturities, a move that would give the cash-strapped nation desperately needed breathing room.

State-owned oil producer Petroleos de Venezuela SA has seen its $3 billion of bonds due in April jump 5.3 cents this week to 69 cents on the dollar, the highest September 2014. Investors are buying amid rumors that the company known as PDVSA is pursuing a swap that will allow it to reduce debt service in 2017, said Daniel Urdaneta, a strategist at Knossos Asset Management in Caracas. The struggling oil producer faces interest and principal payments of almost $7.5 billion next year.

But to Nomura Holdings Inc.’s Siobhan Morden, bond investors may be getting ahead of themselves.

“The catalyst was an investor call from an investment bank that appeared more like a reverse inquiry to solicit business than any firm mandate for an official exchange,” Morden, the head of Latin America fixed-income strategy at Nomura, said in a report Wednesday. “There was nothing of substance to suggest any imminent launch of a formal offer, especially considering the delayed secondary buying.”

PDVSA’s finance department didn’t immediately respond to a request for comment.

For a snapshot of Venezuela’s economy, click here for Credit Dashboard.

On Saturday, Oil Minister and PDVSA President Eulogio Del Pino warned said that he had bad news for those waiting for the company to fail and that the next few days would bring important announcements from different parts of the industry. He also said PDVSA was working with drillers and service suppliers on a plan to convert commercial debt into financial debt, which would allow companies to continue operating in the country, according to a July 16 statement posted on PDVSA’s website. 

The company’s revenue from oil sales slumped 46 percent in 2015 to $55.3 billion as crude prices collapsed, fueling speculation the producer may not have the cash to stay current on its debt. The company has interest payments totaling $212 million in August, with larger payments of $1.4 billion and $2.8 billion coming in October and November, respectively, according to data compiled by Bloomberg.

Still, trading in credit-default swaps show that investors continue to reduce short-term default expectations, with the implied probability that it happens over the next 12 months falling to 51 percent from 60 percent just a month ago and 82 percent earlier this year. The probability of a default in the next five years is 90 percent, according to credit-default swaps.

The timing of a debt deal may be complicated by rising tensions between the opposition-controlled National Assembly and the Supreme Court that backs President Nicolas Maduro, which risks worsening a political crisis in a country already reeling from mounting economic turmoil.

“An important implication for investors comes from the legal uncertainty associated with the validity of decisions of the legislative and judiciary from now on,” Francisco Rodriguez, chief economist at Torino Capital in New York, said in a research note on Monday. “The validity of future sovereign debt operations could thus be thrown into question if there is doubt about the authority of either the judiciary or the legislative to decide on these issues.”

And while a deal could benefit PDVSA amid falling revenue and Venezuela’s dwindling foreign reserves, the company would have to offer more attractive pricing to convince bondholders to accept a debt swap after the rally, which could make the deal expensive, Rodriguez said in an interview.

The country’s international reserves fell to a 13-year low of $11.9 billion on July 7, according to data compiled by Bloomberg.

“It’s a little late to do this,” he said. “Ideally the government should have considered this transaction in January or February, when the prices were favorable. Now, those bonds have risen in price and the problem is going to be expensive.”

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