Venezuela Default a Sideshow as Bond Investors Hold Out Hope

Updated on
  • S&P cuts the sovereign’s credit rating after delayed payments
  • But most bond investors stand pat believing money on its way
Why Venezuela Is Getting Increasingly Desperate

Venezuela and its state oil company are now officially in default. It changes nothing for bondholders.

The declarations in the past 24 hours by S&P Global Ratings, Moody’s Investors Service and Fitch Ratings only confirmed what they already know -- PDVSA and the government are late on debt payments amid an unprecedented cash crunch and difficulties getting money through the chain of intermediaries. They’re well aware that holders of credit-default swaps are seeking to trigger payments on their insurance contracts, but that’s a $1.6 billion market that pales in comparison to the $60 billion of bonds that circulate among traders.

What really matters to bondholders is that officials continue to say they’ll honor obligations and in fact seem to be making determined efforts to do so, with the government information minister affirming Tuesday that delayed sovereign payments were being made. Speaking Monday before a gathering of creditors summoned to downtown Caracas for restructuring talks, Venezuelan Vice President Tareck El Aissami pledged that the oil-rich nation would work to find new ways to deliver bondholders’ money.

Casting blame on international financial institutions for holding up the funds, he pointed out that PDVSA delivered $2 billion of payments within the past couple of weeks, part of a total $70 billion that President Nicolas Maduro says the government has shelled out since he took office in 2013.

While the default makes it possible for a group of aggrieved creditors to band together and demand immediate repayment of their bonds -- a move referred to as acceleration -- there’s little incentive for them to do so. Venezuela doesn’t have the money to pay all the principal back at once, and a move to accelerate would in reality only lead creditors to restructuring talks with the government or international lawsuits.

Both of those options promise to be messy and drawn out. So given how the government remains eager to pay -- despite its simultaneous and confusing claims that it wants to renegotiate the debt -- most bondholders figure they’re better off being patient and waiting for delayed payments.

“Now the ball is in the bondholders’ court,” said Ray Zucaro, chief investment officer at Miami-based RVX Asset Management, who holds Venezuelan debt. “Accelerate or not? That’s the question. And the answer is, if you think they make the payments, no. Don’t mess up the gravy train while you still can.”

Prices for notes from the government and PDVSA slipped Tuesday, reversing some of the recovery they had seen in recent days after plummeting in the immediate aftermath of Venezuela’s Nov. 2 announcement it would seek a restructuring. Benchmark bonds due in 2027 slipped 2.1 cents to 26.6 cents on the dollar, down from 38 cents at the end of October.

S&P cut the country’s rating to selective default after the nation failed to make about $200 million of interest payments by the end of a 30-day grace period, while Fitch downgraded it to restricted default. Moody’s sent a statement on Tuesday referencing a default, after previously saying PDVSA was in breach. Plagued with payment delays and plunging foreign reserves, it’s the first time that Maduro’s government has exceeded the buffer period on its bonds.

Investors in the credit-default swaps market have different incentives, and those who bought insurance against a default by PDVSA are eagerly awaiting a ruling from the International Swaps & Derivatives Association on whether the failure to make a complete principal payment Nov. 2 constitutes a credit event. On Tuesday, an additional request was made for ISDA to determine whether the sovereign’s delayed payments on its 2019 and 2024 bonds would also trigger swaps contracts.

Most bondholders remain focused on the chances they’ll eventually get paid, and see the delays they’re experiencing now as more of a technical hiccup than anything more sinister.

“The payments they’ve said they’ll make have been paid, albeit delayed,” said Shamaila Khan, director of emerging markets at AllianceBernstein, the eighth-largest reported holder of Venezuelan debt securities. Still, “willingness to pay has been impaired and it’s not clear what the government’s motivations are. Therefore the risk of them not paying at all is not insignificant.”

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