Seven Wall Street Firms Are Betting Big on PDVSA Bond PaydaysBy
Implied probability of Venezuelan default in next year at 54%
Seven firms hold more than 25% of company’s debt due this year
Last month’s dip in PDVSA bonds coming due in a few days shows how nervous some investors are about a default. But some of the biggest holders are now extending their bets on Venezuela, selling the shortest-term securities to buy notes that mature in November.
The theory is that the state-owned oil company will not only get through this week’s payment, but survive until the end of the year without running out of cash. It’s a bold bet as the country’s foreign reserves tumble amid a shortage of hard currency to pay for imports such as food, medicine and toilet paper.
PDVSA’s bonds due Wednesday have gained 3.6 percent after dropping on March 31 to their lowest level in more than a month as a clash between the Supreme Court and legislature heightened fears that the fractured nation was headed for disaster. There’s still a 54 percent implied probability of a Venezuelan default in the next 12 months, up from 40 percent in February, according to credit-default swaps data compiled by Bloomberg.
"I expect payments to be made; however, this is not a risk-free proposition," said Jan Dehn, the head of research at Ashmore Group, which oversees about $52 billion of assets from London. "If you think they pay, then buy into the weakness ahead of upcoming maturities. If you are right, the bonds rally as it becomes clear that payment is forthcoming and you end up making a handsome return."
Ashmore is the third-largest holder of PDVSA bonds maturing in the next year, with 4.3 percent of the total amount outstanding, according to data tracked by Bloomberg. Only T. Rowe Price (9.1 percent) and Fidelity (5.1 percent) have more. Altogether, seven firms hold more than a quarter of the company’s debt due in the next 12 months, according to the latest filings, some of which are more outdated than others. All the firms except Ashmore declined to comment.
|Holder Name||Percent Outstanding||Percent Change from Last Filing||Last Filing|
|T Rowe Price Group Inc.||9.1%||-37.3%||Dec. 31, 2016|
|Fidelity Management & Research LLC||5.1%||-15.7%||Feb. 28, 2017|
|Ashmore Group PLC||4.3%||-4.0%||Feb. 28, 2017|
|Stone Harbor Investment PLC||3.7%||-15.5%||May 31, 2016|
|Allianz SE||1.7%||-62.4%||Feb. 28, 2017|
|Prudential Financial Inc.||1.0%||-18.4%||Feb. 28, 2017|
|NN Group NV||1.0%||+100.0%||March 31, 2016|
With foreign reserves at a 15-year low, Venezuela has relied on everything from gold to China to Wall Street investment firms for assistance in paying its debt. Last week, the government secured at least $300 million from David Martinez’s Fintech Advisory Inc.
The high yield now available on the notes due in November caused many of the nation’s biggest owners of the April bond to switch their holdings, BCP Securities LLC chief economist Walter Molano wrote in a note last week. PDVSA’s top seven investors all hold more of those bonds than the maturity coming due on Wednesday, according to holding data compiled by Bloomberg. Yields on the November notes are at 41 percent, near a four-month high.
"No one can predict the exact date on which they will default," said Sarah Glendon, the head of sovereign research at Gramercy Funds Management in Greenwich, Connecticut, noting that default risk has been high since 2014. "Instead of the market discussing default in the context of ‘not this year, but next year,’ the focus seems to be on ‘not this maturity but the next maturity, or even coupon.’"