Venezuela’s bonds soar after US capture of President Maduro

By Marc Jones

LONDON, Jan 5 (Reuters) – Venezuela’s default-hit government bonds surged on Monday after the surprise weekend seizure of President Nicolas Maduro by the U.S. fuelled hopes for one of the largest and potentially most complex ever sovereign debt restructurings.

Bonds issued by the government and state oil company Petroleos de Venezuela, known as PDVSA, jumped as much as 10 cents on the dollar, or almost 30%, as bullish investors swooped on the developments.

JPMorgan analysts, who had predicted the “strong bounce” in prices, said investors were putting aside their questions and focusing on who is likely to now be in charge in Venezuela and the path to a debt restructuring.

If U.S. President Donald Trump backs interim President Delcy Rodriguez for the role, the “logical next steps include the restoration of formal diplomatic relations and expanding licenses, including at some point for negotiations around a debt restructuring,” the analysts said.

Venezuela’s bonds, which went into default in 2017, were the world’s best performing last year, nearly doubling in price as Trump ratcheted up military pressure on Maduro.

Monday’s market moves ramped most of them up to 40 cents on the dollar, Tradeweb data showed, and lifted PDVSA debt by at least 9 cents to roughly 30 cents on the dollar.

Venezuela’s government and PDVSA have defaulted on bonds with a face value of around $60 billion, analysts estimate. 

However, the country’s total external debt, including other PDVSA obligations, bilateral loans and arbitration awards, stands at around $150 billion to $170 billion, depending on how accrued interest and court judgments are counted. 

Of that, $4 billion is owed to multilateral lenders the Inter-American Development Bank and CAF, JPMorgan estimates, with roughly $13 billion-15 billion worth of bilateral debt owed to China too.

EXCEPTIONALLY COMPLEX

The Venezuela Creditor Committee (VCC), which includes asset managers GMO, Greylock Capital, Mangart Capital, T Rowe Price and Fidelity, declined to comment on the restructuring prospects, but other investors said it was likely to be a lengthy and complex process.

“Persistent political uncertainty, the high likelihood of a protracted and complicated debt restructuring, and limited visibility on Venezuela’s repayment capacity will likely cap the upside in bond prices,” said Alejo Czerwonko, UBS Global Wealth Management’s chief investment officer emerging markets Americas.

Citi analysts predicted it would require “a multi-track, multi-year settlement framework”, given the sheer amount of debt involved, the highly fragmented creditor base and the tangle of legal and U.S. sanctions issues.

“We expect Venezuela’s debt restructuring to be exceptionally complex, arguably comparable to Greece’s (in) 2012,” they said in a research note.

The outcome will be “highly sensitive” to assumptions around post-transition GDP normalization and the pace of oil-production recovery, they added.

Their base case was for Venezuela to impose a 50% principal writedown – or “haircut” – on its current bonds. It could then offer creditors a 20-year “new bond” plus a separate 10-year zero-coupon bond to make up for all the missed interest payments since 2017.

“We assume debt would need to be reduced at least to around 85% debt-to-GDP at the time of restructuring,” compared to almost 175% currently, Citi’s analysts said.

“Assuming 14% of oil revenue is dedicated to external debt obligations, the new bonds could afford a coupon at around 4.4%,” they added. 

Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments, which has exposure to Venezuelan bonds, said the U.S. government was likely to want a restructuring to be fast-tracked as it would help bring U.S. oil firms into Venezuela.

He was cautious however about how much further the bonds might rally from here.

“There’s going to be a conversation, and I think it’s a very valid conversation, about how much more upside can you squeeze out of this.”

(Additional reporting by Rodrigo Campos, Karin Strohecker and Davide Barbuscia; Editing by Alison Williams, Alexander Smith and Jan Harvey)