Venezuela debt rally may falter despite oil price, election


NEW YORK, April 26 (Reuters) – Investors buying Venezuelan debt in recent weeks on hopes the May elections might bring a new government or that rising oil prices will bolster the OPEC member’s creditworthiness may be in for a rude awakening, analysts and portfolio managers say.

Venezuelans are crossing by the thousands every day into neighboring Colombia and Brazil as an escalating economic and social crisis has left millions suffering from shortages of food and medicine.

But those counting on a regime change should be mindful of the opposition’s inability, so far, to fully coalesce around the candidacy of 56-year-old former soldier and governor Henri Falcon who is running against President Nicolas Maduro.

And the bets investors are making based on crude oil prices trading at the highest levels in more than three years are offset by Venezuela’s rapidly declining oil output.

Since October of 2017, the Venezuelan government and state-owned oil company Petroleos de Venezuela (PDVSA) have both missed making debt payments of $2.6 billion through early April, according Millstein & Co, which was recently hired as a financial advisor by some of Venezuela’s creditors.

The country’s decision to selectively make debt payments has pushed some bond prices up and left others to languish.

For PDVSA’s 2020 bond issue, backed by assets of refiner Citgo, prices have held up with the bid around 86.5 cents on the dollar and a yield hovering near 20 percent.

But the benchmark Venezuelan 2027 bond dropped to around 19 cents on the dollar in early January before rallying to its current bid price of 31.625 cents.

The very low bond prices tempted distressed-debt investors into the market earlier this year, said Ray Zucaro, chief investment officer at RVX Asset Management in Miami.

“What I think has happened more recently,” he said, “is that the overall situation in Venezuela has become so bad, so chaotic, that the general sentiment is ‘well, we’ve got to be near the end or closer to the end [of the current government] than we were before’.”

Zucaro said he bought PDVSA debt earlier this month, but declined to give more details.


Venezuelans will head to the polls on May 20 and president Nicolas Maduro is running for reelection. The opposition has called for a boycott of the vote and the electoral process was rejected by the United Nations Human Rights Council.

The main hope for some investors and Venezuelans alike is that the alternative candidate, Falcon, a former member of Maduro’s party, can emerge as a transition leader. He currently leads Maduro by 7 percentage points in voter intention according to pollster Datanalisis.

“I don’t think there’s any real chance Maduro’s side would win a fair and free election, but the probability that the election will be fully free and fair is very low,” said Paul McNamara, London based Investment Director in global asset management firm GAM’s Emerging Markets Team.

Optimism regarding the potential for a regime change is misplaced, said Kathryn Rooney Vera, head of research and emerging market strategy at Bulltick LLC in Miami.

“There’s very little reason to be optimistic,” she said, adding that “the regime that is in charge right now is unlikely to make the economic reforms necessary to continue servicing the debt in a reasonable way.”


The election notwithstanding, some analysts see the rise in bond prices as a reflection of the steady increase in the price of crude oil in the past year, as Venezuela sits atop the world’s largest proven oil reserves.

“The biggest reason for the rise in Venezuela debt prices is the oil price,” said GAM’s McNamara, adding: “The higher the oil price is, the Venezuelan debt is effectively an option on the very long-dated price of oil.”

Front month crude oil futures have more than doubled from the 2016 lows near $26 per barrel, hitting a more than three-year high near $70 earlier this month.

Venezuelan oil production, however, has shrunk to about 1.6 million barrels per day last January from 2.3 million in January 2016 according to the U.S. Energy Information Administration. OPEC data shows the decline has continued through this year.

“Price is doing great but (Venezuela’s) production is crappy, so it’s not really helping them out as much,” said RVX’s Zucaro.

“They’re at a point where they’re not able to really truly benefit from higher prices.”

Reporting by Rodrigo Campos; additional reporting by Paul
Kilby and Devika Krishna Kumar in New York and Brian Ellsworth
in Caracas; Editing by Daniel Bases and Clive McKeef

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