It's Crunch Time for a $2 Billion Gamble on Venezuelan Bonds

  • PDVSA to pay $2.1 billion in principal, interest on April bond
  • Bonds due on April 12 have traded at about 95 cents per dollar

Just how much do you trust Venezuela?

That’s the question to ask as $2 billion of bonds from the state-owned oil company that come due next month trade at about 95 cents on the dollar. Traders with nerves of steel might be able to bank a quick profit if all goes well and Petroleos de Venezuela SA honors the debt. But there’s always the chance that won’t happen.

Venezuela investors have been on default watch for years now, racking up some of the world’s highest yields for dollar-denominated debt amidst the omnipresent threat that it will all go belly up at some point. The country sits on the world’s biggest oil reserves, but suffers from a chronic shortage of dollars that has decimated central-bank reserves and left the government unable to import enough medicine and basic goods to meet citizens’ needs.

“The short-end trade on Venezuelan bonds has worked every time,” said Daniel Urdaneta, a Caracas-based strategist at Knossos Asset Management. “Until it doesn’t.”

Money managers at Knossos know the risks well. The hedge fund had plowed half its money into soon-to-mature Venezuela bonds early last year and made 12 percent in just 45 days -- an excess of 150 percent on an annualized basis. This time around, the fund is more defensive with holdings of longer-dated, lower-priced Venezuelan bonds.

PDVSA’s bonds due April 12 offer an annualized yield of 80 percent, reflective of the skepticism that’s made the country the most likely to default over the next year -- a 34 percent probability, according to prices for credit-default swaps that protect against non-payment. Investors look at reserves hovering near a 14-year low of $10.4 billion, see $9 billion of bond payments left this year, and don’t like the math.

Still, Nomura Holdings Inc. and Torino Capital say it’s most likely PDVSA will make good on its next payment, though the outlook for the rest of the year may be dicier.

Francisco Rodriguez, the chief economist at Torino in New York, says that after making the April payment the company may seek to re-profile some of its debt due in coming months and years, like PDVSA did last year. PDVSA’s next bond, due in November 2017, has been trading at about 87 cents. That compares with the sub-50 cent price on some longer dated bonds such as debt due in 2035.

“The company may plan a liability management operation later in the year,” he said. “We are uncertain whether such an operation can be successful.”

Siobhan Morden, the head of Latin American fixed-income strategy at Nomura, says how PDVSA makes the payment -- whether by tapping international reserves or using off-balance-sheet funds -- may provide hints on the timing of an eventual default. In the short term, traders could make a hefty profit.

“I think those bonds are to be paid so they should still benefit from the pull to par process,” she said. “You’ve only got a few points left in that trade. Of course a few points for a few weeks is attractive.”

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