The oil and bond market participants have hardly had time to take a breather after Venezuela’s disputed regional election, as the cash-strapped crisis-stricken country has to make more than $2 billion in bond payments over the next week—payments that it can’t miss because it could otherwise trip the wire to bondholders just waiting for a default.
In the past week, the government of the country that sits on the world’s biggest oil reserves failed to pay bond coupons worth a total of $586 million. But these payments have grace periods of 30 days, which Venezuela has made use of. The troubled nation is now gathering the cash to pay the maturities due this Friday, October 27, and next Thursday, November 2.
On those days, state-controlled oil firm PDVSA must pay $985 million this week, and another $1.2 billion six days later. These nearly $2.2-billion payments don’t have grace periods like the ones it has most recently skipped, and missing them would give bond investors reason to cry default. Such an outcome would plunge the economy into an even deeper crisis, and possibly shut down some oil production, which has declined in the past year anyway due to lack of investment.
Not only is oil production dropping, but Venezuela’s crude oil quality has also been deteriorating due to a shortage of funds at PDVSA to treat its heavy crude oil.
The general consensus among analysts is that Venezuela will pay its maturities this week and next, at any cost. But experts also say that owning Venezuela bonds is no longer compatible with socially responsible investing. Related: Aramco CEO Warns Of Imminent Oil Supply Crunch
There is much speculation in the market regarding last week’s missed payments. Is it that Nicolas Maduro’s regime just doesn’t have the money? Is it saving cash from those earlier payments with grace periods to pay the “can’t-miss” maturities? Is it the latest U.S. sanctions that possibly made it more difficult for the banking system to process?
Regardless of the reason for the missed payments, everyone except the credit default swaps holders hope that Venezuela will make the two payments due in the next 10 days.
“I don’t see how any person who’s involved in Venezuelan debt can be anything except concerned, except for those who have credit default swaps” Russ Dallen, managing partner at Caracas Capital Markets, told CNBC.
For investors, Venezuela has reached a breaking point, according to Nathan B. Sandler, co-founder and managing partner of ICE Canyon, an alternative investment management firm specializing in emerging markets, including Venezuela.
Capital markets have provided a critical lifeline to Venezuela’s regime, but considering the current situation in the country, “we think that owning Venezuelan bonds is morally incongruent with socially responsible investing,” Sandler said.
The expert also suggests that current sanctions are weak and not yielding the intended results, and the U.S. should tighten sanctions by banning oil imports from Venezuela and expanding the sanctions list to include companies under contracts with Venezuela’s government.
Venezuela uses cash and credit from China and Russia in oil-for-cash deals that have so far helped it to avoid a default, according to Sandler.
Maduro is said to be increasingly cozy with Russia and is reportedly offering prized Venezuelan oil projects to Rosneft in exchange for cash. Maduro visited Russia earlier this month and held talks with Vladimir Putin, including on economic and energy issues.
While the regime seeks support from Russia, Venezuela’s international reserves had dropped to less than $10 billion in August, according to rating agency Fitch.
“The authorities’ payment record through severe economic and political stresses has demonstrated the sovereign’s strong willingness to service debt. However, the expected reduction in the international reserve position in the context of sanctions will severely test the government’s capacity and willingness to continue with timely debt service,” Fitch said when it downgraded Venezuela’s sovereign ratings in the wake of the latest U.S. sanctions.
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This month alone, Venezuela is already behind some debt payments with grace periods. Whether Venezuela makes the no-grace-period payments due in the next 10 days will show how willing—and financially capable—the regime is to continue servicing its debt. Even if the government fails to make the two upcoming payments, it’s not certain that bondholders would want to trigger a default, according to experts who spoke to Bloomberg.
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“Most of the bonds are with U.S. funds or local investors who won’t have an incentive to trigger a default,” Lutz Rohmeyer at Landesbank Berlin Investment, the 13th-largest reported holder of PDVSA’s 2017 bonds, told Bloomberg.
Nevertheless, credit default swaps show that investors see a 99 percent chance of PDVSA defaulting in the next five years, and a 75 percent chance of such an outcome in the next 12 months.
Default may not be as imminent as next week, but it’s certainly in the cards for the oil-rich country that struggles to pay for gasoline imports and to feed its own people.
By Tsvetana Paraskova for Oilprice.com
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