By Vivienne Taberer, Portfolio Manager
What we know:
- Last week President Maduro announced that Venezuela was transferring the funds for the payment of the principal and coupon of the PDVSA 2017 bond. PDVSA is the state-owned petroleum company.
- He simultaneously said that Venezuela ‘would refinance and restructure’ its external debt going forward.
- Maduro strongly suggested they might not fulfil their commitments, but that authorities would make decisions based on the perceived risks of bondholders seeking to accelerate repayments. He announced a presidential restructuring and refinancing committee to be led by Vice President Tareck El Aissami (who has been sanctioned as a narco-trafficker – which further complicates the issue).
- There is still no real clarity on what this means and whether or not they would cease future payments, but on Friday Mr El Aissami stated that they would keep paying for now.
- The market will therefore need to watch how they handle their upcoming coupons and those in the grace period.
- There is also a reasonable possibility that the government could opt to pay PDVSA and default on Venezuela – given their desire to protect the state-owned oil company’s assets and there being no cross default between the entities. This is made more probable given the government just paid the PDVSA 2020 amortisation and are paying the 2017 maturing bond.
- There is also an argument that from Venezuela’s perspective, a selective default could be a credible threat to incentivise investors to accept a restructuring proposal rather than face a lengthy legal battle.
- Given the sanctions it seems that even if it were their intention, Venezuela would find it very difficult to launch a voluntary distressed exchange like Uruguay’s one in 2003. There could however be a few avenues the government could attempt to pursue, i.e. amending terms on existing bonds with the consent of the bondholders, issuing bonds for food and medicine and issuing to non-US investors.
Impact on bonds:
- Prior to the announcement Venezuela and PDVSA had a weighting of 1.5% in the EMBI Global Diversified Index, and the Venezuela sub-component of the index level fell 25% on Friday. Venezuelan bonds finished the day at around 1.1% of the index.
- A default would not see them excluded from the benchmark – they would however be excluded if the bonds no longer met liquidity requirements.
- For comparison, Argentinian bonds remained in the benchmark post the 2001 default.
- Prices have fallen sharply, with the higher priced, higher coupon bonds falling the most.
- We have modest holdings in our EMD Blended and Hard Currency strategies of low coupon, low dollar priced, predominantly PDVSA bonds, which we had been starting to gradually sell out of.
- The mix of our holdings means that although these bonds experienced an absolute fall in value, relative to the benchmark our holdings have performed well.
Our strategy from here:
- We will continue to monitor the news and price action very closely and will conduct ongoing analysis prior to making any trading decisions.
- Where possible we will look to reduce and mitigate risk, either by lightening up in bonds which we think are expensive relative to the rest of the PDVSA/Venezuela universe or switching from expensive to cheaper bonds.
- Using the information available at the moment, we are more constructive on PDVSA rather than Venezuelan sovereign debt.
- Although bonds may trade lower over the short term, we do still believe that the majority of issues are now trading below expected long term recovery values.
This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.
Issued by Investec Asset Management, issued December 2017.