Venezuela's Bond Investors Are Wondering If They've Been DumpedBy
Sovereign bond investors haven’t got a payment since September
Government is overdue on $700 million of sovereign coupons
Venezuela investors are worried they’re getting ghosted.
That’s the concern among a growing number of sovereign bondholders six weeks after the government’s mysterious announcement that it would seek to restructure its debt while also continuing to pay what’s owed in the meantime. It’s now been a month since a creditor meeting in Caracas produced no specific proposals, and as overdue bond payments pile up without any word from officials, the relationship looks to be on rocky ground.
Things don’t look quite as bad for investors in the state oil company, Petroleos de Venezuela SA, or PDVSA. While payments on some of those notes are overdue as well, officials there seem to be making a more concerted effort to fulfill their obligations. Since the restructuring announcement, none of the government debt has been paid, while at least three PDVSA bonds have. It begs the question: Is the sovereign taking advantage of investors’ fidelity to quietly, selectively default on them?
“There’s a lot of uncertainty, and it’s impossible to tell whether missed coupons are a result of non-payment or of obstacles in the payment mechanism,” said Graham Stock, the head of emerging-market sovereign research in London at BlueBay Asset Management. “If the former, then certainly it could be a selective default.”
Venezuela last made a payment on its sovereign debt in September. The government is now overdue on $700 million of interest on eight bonds -- six of which were deemed in default after their grace periods expired. While President Nicolas Maduro and his allies have repeatedly said the nation honors its debt -- and that the payment chain has been held up by financial blockades staged by capitalist enemies -- those reassurances have grown less frequent in recent weeks. The last time officials said they transferred funds to pay creditors was Nov. 15, for two bonds which still remain unpaid.
Meanwhile, as though everything were normal, both government and PDVSA debt still trades with accrued interest, per guidelines recommended by the Emerging Market Traders Association. Unlike a typical default scenario -- in which bonds begin trading “flat” without accrued interest or rights to the missed coupon -- in this case investors are technically operating with the expectation that those payments will come through.
Indeed, many long-term investors, known as “real money,” probably won’t sell their holdings in Venezuela until they’re sure no more paydays are coming their way, according to Bank of America Corp. It’s hard to tell when that’ll be without clarity from the government, strategists at the bank wrote in a report Dec. 13.
A spokesman for the Economy Ministry declined to comment, saying he wasn’t authorized to do so. Calls to Venezuela’s public credit office went unanswered.
The question of whether Venezuela may ultimately prioritize PDVSA’s debt over its own has long been contemplated because the oil producer is the nation’s money-maker and main source of foreign revenue. Some PDVSA bonds are backed by refining assets in the U.S., providing an even bigger incentive to stay current on those obligations. Meanwhile, the sovereign has two huge principal payments coming up in 2018, an election year (no specific date has been set). Perhaps, some bondholders speculate, the government thinks that cash could be better spent on the impoverished electorate.
On the other hand, the election may provide an incentive to keep paying, since “most governments don’t survive a default,” said Shahriar Shahida, co-founder of New York-based hedge fund firm Constellation Capital Management, which holds Venezuelan debt. “Even if they do decide to default, they will make every effort to wait until after the elections.”
Either way, there isn’t much investors can do about their situation at this point. U.S. sanctions prohibit them from engaging in a debt restructuring, while there’s little incentive to accelerate, or demand immediate repayment of principal. That tactic is sure to produce a protracted legal battle with no guarantee of repayment.
The turn in Venezuela’s behavior, after years of providing investors with some of the best returns in emerging markets, has been difficult for bondholders who recall their best days with fondness. There’s even a support group of sorts that’s emerged from a list of investors that Venezuela mistakenly leaked last month, when almost 200 people -- mainly mom-and-pop types -- registered for information about the creditor meeting in Caracas.
“Every day another investor emails the group to say, ‘I don’t seem to have received my coupon -- does anyone know what is happening?’” Stock said. “People may feel like they’re being broken up with, when in fact, she never even knew their name.”