Venezuelan investors are getting ready for a wild ride over the next five weeks as the government stares down $3.5 billion in debt payments.
While all the country’s due dates in the past year have elicited serious hand-wringing, the next few are on a whole new level. That’s because unlike recent transactions in which a 30-day grace period allowed Venezuela to avoid default, the upcoming deadlines have no leniency. Further complicating matters, some of the bonds are backed by a majority stake in Citgo Holding Inc., potentially putting one of the biggest U.S. refiners in play.
“There’s no ‘Oops, I did it again,”’ said Ray Zucaro, the chief investment officer at Miami-based RVX Asset Management, which holds PDVSA bonds, but not the ones with principal payments in the next few months. “It would be an existential crisis, like removing the key block in the game of Jenga.”
While Venezuela’s finances have been teetering ever since oil fell below $100 a barrel three years ago, President Nicolas Maduro and his late predecessor, Hugo Chavez, have always made sure foreign bondholders got paid. But the government has struggled to make payments on time in the past year after disruptions in the chain of banks, trustees and other agents that gets cash to creditors, as well as increasing scrutiny of the nation’s financial transactions amid sanctions imposed by the Trump administration.
In the past, a few days of delay didn’t matter much because rules of the bonds allowed for some flexibility. But that’s not the case for a $842 million payment from the state oil company due Oct. 27 for amortizing bonds that mature in 2020, or the $1.1 billion due on a bond that matures Nov. 2.
Investors are worried that some type of hangup could trigger an accidental default. Adding to that concern is speculation that a few ruthless hedge funds may seek to trigger a credit event in order to get their hands on Citgo. The Petroleos de Venezuela SA bonds due in 2020 are backed by an equity stake in Citgo Holding, in the event of a missed payment.
A portfolio manager for one of PDVSA’s 10 largest reported bondholders said that his firm sold all of its 2017 bonds over the past month due to the downside risk, favoring the 2020 notes given the value of the collateral. He asked not to be identified, citing his firm’s policy.
One of the most mystifying aspects for bondholders has been confusion over how exactly Venezuela’s payments are transferred as more financial institutions refuse to do business with Caracas. In November, Citigroup Inc. resigned its role as paying agent on six PDVSA bonds after delayed coupon payments on three of the notes activated grace periods.
Eulogio Del Pino, PDVSA’s president at the time, blamed the problem on the New York-based bank, telling bondholders to “call Citibank and complain.” Its role was taken over by Law Debenture Trust Company. Then in December, Delaware Trust Company became the paying agent for all of PDVSA’s bonds following its acquisition of Law Debenture.
A default could be triggered if PDVSA causes a delay in processing payments for a bond without a grace period and holders of at least 25 percent of the notes vote for an acceleration, according to Richard Cooper, a partner at Cleary Gottlieb Steen & Hamilton, who has advised Puerto Rico and a variety of Latin American companies on debt restructurings. If PDVSA delivers U.S. dollar-denominated funds in full and on time to its paying agent, any potential delay in transferring money to bondholders would be the responsibility of the paying agent and wouldn’t trigger a credit event, he said.
“The stakes are definitely high,” said Victor Fu, the director of emerging-market sovereign strategy at Stifel Nicolaus & Co. While the probability of an accidental default appears small, “the outcome of delays could be catastrophic.”
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