Last week was one of the wildest in the recent political history of Venezuela. After the opposition’s unexpected landslide victory on 6D, the government’s reaction has been little short of schizophrenic.

Venny investors have been at the head of the rollercoaster. Adrenaline junkies that we are, we’ve loved that good-ol’ volatility that fueld our love-hate relationship with these pieces of paper.

All week, the market got yanked about by two conflicting forces. On the upside, a better than expected electoral result, with a new majority raking up two-thirds of the seats and a surprisingly peaceful aftermath. On a negative note, the Venezuelan crude oil basket is hitting a 12-year low of 31,24 $/bbl.

The market’s reaction has been similarly mixed. The ‘short-end’ bonds are under a buyers’ strike, down almost 14% from recent highs mainly attributed to  renewed default fears. The PDVSA bonds due in 2017, which are seen as potential – yet distressed – candidates for a debt swap by Morgan Stanley (something we, ehm, highlighted a couple weeks ago), are down big time this week and trading below 55 cents on the dollar.

That leaves them yielding a loco 60% rate at current prices.

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The rest of the curve weakened over the course of the week: WTI crude oil hit a new cycle low this Monday, and bonds opened at the month’s lowest. Despite crude oil regaining the 37$ level at the time of this writing, movement remains sluggish. Traders are eyeing this breakout from the 200-day Moving Average, a technical analysis tool used to determine the major trend of an asset price, as a signal that the worst has passed on Venny Land. Or is it merely a way to distract themselves from the divergence between bonds and crude Oil?

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These market movements have interesting implications on the two dynamics of the country’s balance of power.

The movement in price, that is, a convergence in price among all bonds, incentivizes a re-profiling. This is mainly because the relative cost of kicking the can have lessened. Wall Street seems to be OK with 17-18%, the average interest rate paid by PDVSA debt as of today. However it shies away from a notional yield north of 60% – an unrealistic prospect given that nobody seems to really expect PDVSAs to be paid at full face value at maturity.

Given this, common sense dictates that they would be on board for a re-profiling proposal.

The question is still whether these negotiations will continue under a different AN and Finance Minister, if the process extends beyond January 5th 2016, or whether the hopeless Rodolfo Marco Torres will either jump or be pushed out of Maduro’s cabinet.  

Either way, the politics of external debt management next year are going to be a make-or-break issue for the New Majority. Little involvement and they will leave the spotlight the PSUV’s apparatchiks holding the bag, for better or – much more likely, for worse.

And let’s not forget about fundamentals. Current crude oil prices hardly cover production costs – especially in the Orinoco belt. It is evident from a quick glance at the nation’s external accounts that 30$, 50$ or even 70$ oil for that matter, is not enough to keep the economy’s gears greased. There is no easy fix for a global energy supply glut, no “God will provide” in sight. This is going to make the opposition’s challenges fierce on the economic front. Barring a sudden wonder in the oil market, more foreign bailouts will be needed – whether of the Chinese or the IMF kind.

If bond markets are any indication of the future, 2016 is gonna be a hell of a ride for Venezuela. Buckle up!

 

36 COMMENTS

  1. People keep talking about reprofiling, without considering the costs. Pushing the 2016 and/or 2017 forward requires new bonds up to three times the nominal value at current prices and yields. And even at those levels, many people will not accept it given that it is voluntary. What then?

    • Hey, M. Octavio, those are definitely some valid points. Thanks for contributing to the debate. On top of that:

      1. Can you elaborate a bit on the math to get to those results? 3-fold notional exchange ratio seems a bit excessive, IMO…

      2. With the latest market movements, the price differential between the short end and the rest of the PDVSA curve has gone down considerably. Wouldn’t this imply a lesser/more favourable exchange ratio than before?

  2. I think Venny/pdv finances crossed the invisible line and now there is no solution. They are going to default in 2017 at the latest.

    I do not think they are going to restructure before because, as in the 6D elections, they do not really know the magnitude of what is coming towards them.

    They are incompetent to the core.

  3. Venezuela is bankrupt at current and near-term oil price expected levels. A very large IMF (doubtful the Chinese will come up with the $50 bill. or so needed) bailout would help, but with it there would be all sorts of required structural financial lasting reforms, which the Chavistas will likely oppose. So, who wants to buy Venny bonds at this juncture, other than as a crap shoot?

    • Miguel, what % of Venezuela’s reserves are heavy oil, and are recoverable at what price/bbl. today? A recent estimate was that Venezuela’s oil production cost was $23/bbl. or so for its mix of medium/heavy crude, but heavy crude production cost alone might be as high as $65/bbl. Saudi Arabia with $10/bbl. cost of light crude and huge reserves is producing at near max capacity, not just to try to affect shale competition, but to maximize current returns against an uncertain future filled with green alternatives which are increasingly cost-competitive, and which will not be affected by future increasing government restrictions on hydrocarbon usage due to global warming. Venezuelan largely heavy oil in the ground, in this scenario, barring a Mid-East conflagration, doesn’t look too valuable at this point.

      • I dont buy that $65 per barrel production cost. If you had a fir exchange rate, the cost would plummet, because PDVSA’s expenses are calculated at $65. Otherwise how can you explain that in 2003 the cost was $15-20.

        • Canada’s Syncrude tar sands basic production cost is $43+/bbl., $62/bbl. with admin/insurance/et. al. costs included, and although Venezuela pays its oil workers peanuts vs. real wages for other oil workers worldwide, they also have to import additives/even light crude at market prices to upgrade their heavy oil, so that their heavy crude production costs are up there, probably higher than average oil shale production costs/bbl., which are the competitive swing producers.

          • Pdvsa´s salaries and local expenses are calculated at Bs. 6.3 per US$, thus, salaries are HUGE. The problem is giving away gasoline and importing all the gasoline because they are son incompetent and inefficient. You could create projects in the Faja with partners a la Petrozuata and Cerro Negro and investors would come in droves. If PDVSA did not have to pay capital in 2017 to the tune of 3.55 billion, it could service its debt easily. That is why it is a solvency problem only. If they do default, the haircut will be less than 50% which is the reason people buy the bonds.

          • Light crude is mixed with heavy oil because the Jose upgraders don’t work, and they sell the mixture. No light oil is needed to upgrade heavy oil.

  4. As a loyal reader, I´m going to make a point on the editorial line of Caracas Chronicles.

    I find very troublesome and intellectually dishonest that articles like this one start appearing signed by Quico as an author. Quico is a wonderful writer and a politically savvy one, but it does not take a lot of time around here to know that the topic of international capital markets and bond trading is notoriously well beyond his area of expertise. He knows nothing about this topic, and the article is probably written by someone else.

    There is something very wrong with this line of action.

  5. Bonds or no bonds, the Venezuelan Economy is screwed. Swiss bank is already predicting Default on the international debt next year, and the Swiss don’t fool around (unless it’s Chavez’s daughter’s billions, perhaps)

    As Laureano Marquez says,,, “I see a light at the end of the tunnel”. But it’s 16 wheeler truck coming full speed. ” Lorenzo and Ricardo better get on the phone real quick with the IMF, or any other foolish organization willing to bail Vzla out.

    2016 is going to be a TragiComedia of epic proportions. The Economy, stupid, is not gonna get better with a few prayers to Negro Primero or Maria Lionza. The damage has been done, over 40 years of ad/copey, and then, even worse, over 17 Chavista years.

    Hopefully, one day, after even more violence and surrealism, people will start learning again in Venezuela how to make an Honest living, grow a plant of coffee, fish some fish, manufacture Anything non-oil related.
    But that will take decades. Como les gusta un manguito bajito… They will pay the price, I’m afraid, they are vastly under-educated, vastly corrupt, at all levels of society, all “institutions” are rotten, the the MUD will be bribed. Nothing new in Cleptozuela. But next year will be particularly tumultuous, to say the least. The Criminal Chavista cupula, which includes the Military, the “justice” branch, the police, and the shining new “Parlamentos” (2 of them by now). They will be fighting for their huge Guisos, and to avoid Jail Time, in many cases. Increasing violence is inevitable, increasing Economic crisis is also inevitable.

    And the Chavista crowd, Millions, will blame the “MUD” and “El Imperio”, when things to not get any better, but worse in years to come. It will not be pretty.

  6. The reserves are mostly of faja crude and they require a lot of long term investment and some special additional costs to become marketeable which conventional crudes don’t have , its not just the amount of bare production costs but many different factors combined which make their development less attractive than investment in other types of oil deposits , Oil prices are now very low , likely to remain modest for a long time , subject to future uncertainties operational , commercial and political all of which contribute to substancially reducing the value of those underground deposits .

    In a market that’s facing the challenges that current markets face it will be very difficult to get the funding or investors needed to develop those deposits , the challeges become worse if you consider Venezuelas political climate .

    This same exercise of valuing the undeveloped faja crude was done many years ago using rigorous methodology and the results were very disappointing , underground faja deposits aren’t worth as much as people suppose if you look at it strictly on commercial terms !!

    Not usually remembered is that while most deposits are of faja crude there are still quite a few half exploited conventional oil deposits which if exploited under more advanced techniques can yield a very significant production. More attention could be given these deposits even if their size isn’t as large as the faja deposits !!

    • The Jose upgraders were built for those reasons. The infrastructure to add a lot of value to oil is there. Ameriven was producing 41 API oil before Pdvsa took over. Now, not so much.

      • Last I heard building an Upgrader with a 200 kbd capacity costs from 8 to 10 Bln USD and would take some 3 to 4 years to build , the result is that you convert 200kbd of heavy faja crude into 180kbd conventional crude you can market (10% of volume is lost in the upgrading process) . The investment is front loaded so that under current prices it would take a long long time to recover the investment . Venezuela doesnt have the money to build these upgraders and under current market conditions no investors willing to put up the money !! . The existing 4 upgraders capacity is of some 600kbd (all together) , and they are facing quite a few operating problems . Expanding them wouldnt make it that cheap that it would change the fundamental economics. For any one with access to conventional crudes elsewhere the alternative would not be investing in the development of these deposits .

        The deposits themselves vary in quality , the best is the area of cerro negro , which is the one already in exploitation , others are not so attractive involving specific hurdles and problems , more costs and difficulties . Developing the faja under current conditions would require special inducements and very likely a change in both local and international conditions , to begin with a reliable stable favourable political scenario ….which of course is not yet attainable .

  7. There’s the vicissitudes of the bond market. Can Venezuela continue its food subsidies? With or without the Chinese or IMF? Maybe that’s a market to lose sleep over.

    • Unless you are spectacularly wealthy and connected (think an investment bank, or partner at an investment) most investors purchase bonds o. The secondary market. You can hate General Motors, but if you need a car and someone is selling a used one at a reasonable price, it still makes sense to buy it if it is cheaper than the alternatives. Doesn’t mean the money from the Doña you are buying it from funnels back to GM.

      Some of these folk buy bonds to manage their book. Others, for a higher return on the portfolio. Others still, because they need the coupons to round out income. And of course, there are the ones that need stupid risks/pending heart attacks for the thrill…

      Is it unethical to buy the bonds if you are a Venezuelan to get some return on your government’s stupidity while you wait in line for toilet paper?

      There’s an old story about Edward III and his conflict with the Good Parliament. When they impeached his venal finance minister, Richard Lyons, Lyons sent a £1000 bribe to Edward to secure a pardon. Edward did nothing, but kept the money cynically noting that he was only “taking back that which was his own.”

  8. How does Venezuela pay back the Chinese loans? The Chinese are paid in barrels, but those barrels’ market value is going down. Does that mean that Venezuela must send the Chinese more barrels to pay back the same number of dollars that it owes?

    • Well the answer for that is… nobody knows!

      Maybe someone knows something, but the full extension of the Agreement between China & Venezuela are yet to be made public.

        • Read a recent post according to which Petrocaribe supplies have dropped some 140 kbd , supplies to US risen 35 kbd but because Venezuela is importing more refined products from the US than before ( to mingle with basic gasoline or with heavy faja crude ) , in net terms Venezuela is importing more oil products from the US than Venezuela is exporting crude and products to the US .

          Also reported in Blombergs is that authorization has finally been granted US producers of crude oil to export it from the US (until now crude exports have been banned) , this is likely to have an impact on world prices …bringing more supplies to an already glutted market . it certainly doesnt look pretty for Venezuelas oil industry situation !!.

  9. Here’s something else that should have gotten more publicity. Back around the 1st of December Reuters put out a release about Venezuela sending only 50 mil to Uruguay for a 250 mil food order made in July. No cash! And they are behind paying everyone. According to Reuters:

    “As of October, Venezuelan state importer monopoly Corpovex had only paid for $6 billion of the $19 billion of goods it ordered this year, according to an internal Corpovex document seen by Reuters. The entity is indebted to 74 percent of the companies it purchases from, added the report dated October.”

    Stop for a moment and ponder that fact, Corpovex is behind by nearly 13 Billion Dollars (!), (as of October) this year, in payments for their importers. Just imagine what’s gonna happen next year. How do you close THAT gap?

    And, if you don’t, who is gonna provide Corpvex with any kind of line of credit for future imports?

    It’s not just THOSE interest payments that Venni traders should be worried about. This is just as big a threat, if not bigger, to the Venezuelan economy. Liquidity.

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