My cousin Vennie

06 Nov 2017

  • On Thursday evening, in a televised state address, President Maduro announced that Venezuela was restructuring its debts.
  • The timing caught the markets off-guard, and Venezuelan debt prices fell sharply on Friday.
  • Recent events have raised more questions than answers, and there are significant uncertainties surrounding Maduro’s real intentions.

Like it or not, the US is intertwined with Venezuela to a familial degree. The US imports $15 billion worth of oil annually from Venezuela, providing nearly half of the country’s hard currency earnings. The country’s oil company, Petroleos de Venezuela, owns significant assets in the US, including the CITGO brand. Further, there are an estimated 250,000 Venezuelans living in the US.

Given the dependency, it is no surprise that Venezuelan President Nicolas Maduro this week used US sanctions and seizures as an excuse to announce a debt restructuring. Indeed, the country is crimped, with liquid reserves having dwindled to near zero and its access to foreign financing now exhausted. Venezuela’s imminent default has been long expected by economists and prepared for by investors, which is why the country’s longer dated bonds were trading at about a third of face value on the eve of the announcement (see Figure 1). The only unexpected part of this is Maduro’s proactiveness, the fact that he has communicated this clearly and announced a deliberated and orderly process when we know the country and its tradition of policy execution to be anything but.

If Maduro is serious, this act precipitates the debt endgame for Venezuela. Investors can finally place their bets on recovery scenarios, and we will no doubt see hedge funds and distressed players descending on the credit. If the country engages early and intensively with creditors, this could possibly not turn out to be the chaotic mess most of us assumed was inevitable. That is the best case interpretation.

Still, many complications exist. The legal shakeout from this is likely to be convoluted and protracted, given the sheer size of the debt, the lack of consistency in the different bond issues over time, and the importance of bilateral loans in the restructuring — China and Russia are significant creditors to Venezeula, and there is little transparency on these contracts. Further muddying the outlook is that much of the debt is held through Petroleos de Venezuela, which possesses significant assets outside of Venezuela and has used some of these as collateral on its debt. We do not expect this restructuring to be easy or fast. There is also the risk that the benchmark provider (JP Morgan) decides to remove Venezuela from the index during this period, in which event many investors would become forced sellers. But do we trust our cousin Vennie? US restrictions prohibit most international firms from engaging with Venezuela on the restructuring and certainly from transacting in anything that looks or smells like new debt. It’s difficult to envision how Maduro will pull this off, given the potential freezing of oil shipments to the US and lack of bridge financing for a bond tender. We know relations with the IMF are so cold that months of thawing would be required before a bailout could be mobilized. Maduro’s move could simply be a bluff, a chess play executed in order to up the ante on the US and improve his popular approval at home. As long as he can continue exporting oil to the Russian and Chinese buyers that fall outside of the sanctions network, the move could be hugely profitable for Maduro and his cronies.

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