Bond Investors Go Unpaid as Venezuela Cites 'Operational' Issues

  • Coupon payment of $185 million hasn’t reached investors
  • Government says funds were made available in a timely manner

Venezuela Inches Closer to Dictatorship

Venezuela, one of the world’s riskiest debtors, acknowledged it was having problems wiring bondholders a $185 million interest payment that was due last week and said it was committed to paying the debt.

Officials didn’t provide details about what was going on, posting on Twitter that money for the payment had been sent but that “operational changes” were holding things up. Banks have come under increased scrutiny in their dealings with Venezuela after the Trump administration imposed sanctions for what it calls a rolling back of democracy.

Intermediaries tasked with passing along interest payments for the cash-strapped nation hadn’t received the funds as of early Wednesday, according to people with knowledge of the matter. For now it seems like bondholders are willing to give the country the benefit of the doubt; prices dipped, but there wasn’t a massive selloff Wednesday. Still, skeptics believe there’s also the possibility that Venezuela is finding it harder to round up funds even for relatively small payment. The country is currently in a 30-day grace period.

Though long seen by creditors to be on the precipice of default, Venezuela has managed to scrape by for years. President Nicolas Maduro’s government -- and that of Hugo Chavez before him -- has made keeping current an issue of national pride.

“We call on investors to keep their confidence in the republic,” the national public credit office said on its Twitter account. “Venezuela will continue to honor its obligations.”

But even if the coupon gets paid, the delay may be a harbinger for trouble to come. Almost $4 billion of bond payments, mostly by the state oil company, are coming due by year-end. Some of them have no grace period. International reserves at the central bank stand at $9.8 billion, near the lowest in 15 years.

“There is a joke that Venezuelans never arrive to a party at the time the invitation says,” said Ray Zucaro, a money manager at RVX Asset Management. “So people think -- hope -- they will pay it. On the other hand, their options are becoming fewer and far between, and maybe they are really running out of cash.”

In November, PDVSA was late making several interest payments and took advantage of a grace period before getting the funds to creditors.

“I’m not very concerned,” said Bent Lystbaek, a bondholder at Danske Capital. “Incidents like this have happened before, and in the end Venezuela and PDVSA managed to pay.”

Whatever the hold up, the government now has 25 days under the grace period to make good on the payment before triggering an event of default on the notes, $4 billion in bonds due in 2027. The securities pared losses after Venezuela’s Twitter post, slipping 0.6 cent to 37.8 cents on the dollar. The one-year implied probability of default climbed to 69.5 percent, based on credit-default swaps prices from data provider CMA.

Venezuela’s average yield is a whopping 33 percent, compared with an emerging-markets average of 5.1 percent, according to JPMorgan Chase & Co. data.

At the end of October, Venezuela has to make much bigger payments, including more than $800 million in principal for bonds due 2020 issued by the state oil company, known as PDVSA. That payment won’t have a grace period, and those bonds are backed by a first-priority lien on a 50.1 percent stake in Citgo Holding Inc., PDVSA’s U.S. refining arm. A default could unleash what some lawyers say would be the messiest restructuring ever.

If the government doesn’t “organize itself to act swiftly, especially by the end of October, it can default,” said Asdrubal Oliveros, the director of Caracas-based economic consultancy Ecoanalitica. “I am worried about payments that don’t have grace periods.”

— With assistance by Camila Russo, and Fabiola Zerpa

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