Venezuela Bonds Rally as PDVSA Swap Bets Ease Default Concern

  • Nation to offer bond swap proposal for PDVSA 2017: PetroGuia
  • November 2017 bonds end five days of declines on report

Venezuela bonds halted a five-day slide on rising speculation that state-owned oil giant Petroleos de Venezuela SA will soon swap some of its short-term debt for obligations with longer maturities, easing concern that a default is imminent.

The nation’s $4 billion benchmark bonds due in 2027 rose 0.84 cents to 47.84 cents per dollar at 3 p.m. in New York after local media reported that Oil Minister Eulogio Del Pino, who is also president of PDVSA, said the company is in advanced talks to refinance debt due in the next 18 months. Its notes due in November 2017 climbed 2.09 cents to 76.09 cents per dollar.

PDVSA’s bonds have rallied this year, and traders have reduced wagers on a default over the next 12 months, amid speculation that a recovery in oil prices, financial maneuvers and support from China will allow the company and Venezuela’s government to keep servicing its debt for the time being. Traders still see a greater than 90 percent probability of a default in the next five years, prices of credit-default swaps indicate.

“If that happens, it’s clearly positive because it gives them more freedom in the short term,” said Michael Ganske, head of emerging-markets at Axa Investment Managers in London. “It doesn’t change the long-term problem of a dysfunctional economy and incompetent leadership.”

PDVSA’s plan to reduce its short-term debt burden will be announced soon, Del Pino said at an industry event, according to Caracas-based energy news website Petroguia. Bankers at Rothschild & Co. last week held a conference call with investors in PDVSA debt to discuss a plan to swap bonds due in October this year as well as the 2017 debt for a basket of debt due in 2024 and beyond, according to people with knowledge of the matter.

A spokesman for Del Pino said he couldn’t confirm Petroguia’s information on the swap offer, and said he would contact the minister on the matter.

Credit-default swap traders on Tuesday were pricing in a 48 percent probability of Venezuela defaulting by June 20 next year. Back in February, after oil prices fell to a 13-year low, they saw an 83 percent probability it would default by the end of December.

The price of oil has since risen 61 percent.

There have been other hopeful signs. The gap between the official exchange rate and the black-market rate, an indicator of economic dislocation, has narrowed. The pace of outflows from the country’s reserves has slowed too, though they are still at a 13-year low. And on Monday, a group of Latin American central banks agreed to lend the country $483 million.

PDVSA bonds have returned 68 percent in the past six months, more than five times the average for emerging-market corporate debt, while the sovereign bonds are the best-performing in the world over the same period.

“Lots of people thought that 2016 was the year of reckoning, but market consensus now has pushed the doomsday scenario to 2017,” said Daniel Urdaneta, a strategist at Knossos Asset Management in Caracas.

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