Bond holders are knocking on Venezuela’s door, but no one is answering

Posted on November 12, 2017

Investors are keeping an eye on any events regarding Venezuela and its major state-owned oil company, Petroleos de Venezuela (PDVSA), since a principal payment of $985 million has to be wired to them today.


After a few controversial delays in minor interest payments (still unpaid as you read this), many eyebrows are starting to rise and the shadow of doubt is definitely clouding a few concerned heads on Wall Street.


PDVSA, which is the country’s main source of income, has been affected by a lack of separation of its finances with those of the government. This has made the company vulnerable, as fiscal policies have drained its massive resources to maintain the flow of funds required to keep the government’s social programs up and running, which are obviously not a part of its core business.


This administrative chaos has taken its toll on the company’s credibility among investors, as can be seen by its credit default swaps, which are a sort of insurance policy issued for bonds to cover potential defaults, currently trading at a 99% probability of default within the next five years.


Even though investor’s trust over the short-term has always been much higher than that, these recent events, along with considerably large upcoming payments including one due today for $985 million and the other one taking place on November 2 for an amount of $1.2 billion, are being closely followed to see how things are actually going for President Maduro’s government.


As a banker from New York who deals with emerging-markets related securities puts it: “no one really knows what is going on”.


One clue on what’s actually happening might come from the recent sanctions imposed by the U.S. on the country which has severely crippled its capacity to restructure its debt commitments. Also, there’s still room available for deeper sanctions like a potential oil import ban for any crude coming from the country.


Francisco Monaldi, an academic that researches Latin America energy policies has said in this regard that “U.S. refiners pay in cash for the crude, and if Venezuela is losing access to that kind of money, it means PDVSA is in for big financial trouble down the road”.


As only a few hours remain for investors to have a definite answer to the default question, PDVSA remains silent on all its regular communication channels about the matter, building tension among investors and guaranteeing fresh revenues for massage professionals who will deal with the results afterward.


One thing is clear: a default is not actually a matter of if, it is a matter of when.


Perhaps PDVSA will find a service such as the one we provide at extremely useful right now, even though they might need much more than a few credit cards to pay!


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