VENZ/PDVSA: The Quincena from Hell

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On Friday next week – February 26th – Venezuela is due to pay 1,5 billion USD (plus interest) worth of VENZ bonds. The repayment of the much maligned Venny 16 papers is happening amid unprecedented, extreme financial distress on the part of the Republic and PDVSA.

The astronomical yields demanded by investors on the closest-to-maturity debts tell the tale:

ENDGAME - 1It is also happening during a worldwide credit crunch that started on the High Yield energy market and is spreading throughout the globe.

The Oil Price Crash of 2014-2016

It all started in 2014, when markets suddenly started paying attention to the rise of US Shale production and the old worries about “Peak Oil” started to look distinctly silly.

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OPEC also realized this, but deliberately did nothing about it (source: JPMorgan):

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The “price war” strategy on the part of the Saudis has led to the deepest slump in oil prices ever… (Source: Bloomberg)

ENDGAME - 4The crash has set off havoc in bond markets in the energy sector. Save for A-rated names like Exxon Mobil, Shell and the like, holders of risky debt issued by oil companies have endured painful double-digit loses; the lesser the credit quality, the bigger the damage. “Why can’t I get a decent bid?”, is the most asked question in credit trading desks worldwide; the market for corporate bonds has become a running joke.

The CCC tranche, la créme de la crap in this toxic market sector, includes several distressed names, for which the party is soon to be over: Pacific no-longer-Rubiales (the infamous bolichico-linked colombian enterprise); Chesapeake Energy, the United States’ second largest producer of natural gas; Odebrecht, which besides being a corruption-tainted construction company, is also a corruption-tainted offshore drilling contractor for Petrobras; and many others that are threatening to unleash the greatest corporate default wave since the 2008 financial crisis.

And, of course, there’s Venezuela and PDVSA debt. Reflecting the country’s extreme vulnerability to oil price shocks, Vennies were the proverbial canary in the coalmine of the energy debt crisis, with heavy losses at the beginning of the cycle that preceded a market-wide meltdown.

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View from the top – Baskets of energy-related corporate bonds have gone in a single direction since the venezuelan crude oil basket peaked.

While the majority of the market believes Ven 16’s are going to be repaid (and thus were trading at a “healthy” 94% of face value last friday), there is consensus on both the Academia and Wall Street that a credit event in Venezuela has become a matter not of “if”, but “when”.

And Nicolás Maduro ain’t helping at all: first, surprising with moments of fortuitous illumination, when he admits that the shock on oil prices is permanent and that the govt’s finances are hanging by a thread; or him announcing Camimpeg, a new military-controlled oil & gas enterprise that some speculate could be used by PDVSA attempting to avoid asset seizures; or (unconfirmed market rumours) even committing the financial seppuku of selling bonds below 30 cents on the dollar to obtain a fluff of dollar liquidity.

Despite the grim outlook, there are two signs of hope for VENZ at the moment: first, there’s Eulogio Del Pino’s tour of OPEC producers, which has led to a broad-based speculation that OPEC is going to cut prouduction to stabilize oil markets. As it happened, though, an agreement between Saudi and the Russians only saw prices drop further.

More importantly, Luis Salas was kicked out of the economic team by Maduro himself, taking away with him the D-word option he brought to the table last week.

Nonetheless, traders are panicky and unwilling to take risks. The mood has turned a market that used to be minimally functional into a sad game of hot potato. Worst of all: previous assumptions of Recovery Value are being thrown overboard, and bonds have spent most of 2016 plumbing new lows.

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Today sees the start of the longest quincena in the history of the Venny markets.

Brace yourselves.

 

6 COMMENTS

  1. Nice one Daniel! Kudos. Very illustrating post. The bonds market on Venny is just…nuts.

    I believe that Recovery Values for Venny and PDVSA bonds are very related to oil prices. Nonetheless, I still believe they’re above 30 dollars – actual recovery when a debt restructuring deal is closed. In the meantime and before any deal, prices could go as low as 15, or 10 if a default happen.

    In case of a debt restructuring, Venezuela and/or PDVSA cannot afford 3 years of restructuring negotiations and a similar haircut to what Argentina settled, back on 2005 after its financial crisis. It’s too costly. Paradoxically, we rely so much on oil, that we cannot afford a rocky restructuring that jeopardizes all those vital assets in the medium and long term.

    First, VENZ has CACs allowing it to negotiate a better and faster deal. The problem is PDVSA. No CACs means holdouts, if you have written “debt restructuring” somewhere in your near future. AAnd holdouts mean….well, all that’s happening to Argentina since July 2014.

    But “defaulting on VENZ to save PDVSA” does not have any kind of sense right now. After this payment, we know that there’s no VENZ maturity until 2018.

    So….what’s our better shot if the inevitable is coming? Well….hate to say it, but I think is Hausmann’s proposal. If a default is inevitable a these oil prices, they would have to engage into an “orderly” restructuring with an IMF bailout in the process to avoid an apocalyptic consequence derived from an involuntary default.

    But, how to maintain the country politically stable with an IMF “neoliberal” bailout attached to austerity reforms and a “fragile” transition government, with chavismo still being player?

  2. Have said it before , if a Pdvsa defaultl happens it will not be because the regime wants it but despite its horror of falling into defaut , i.e because it cant be helped , because the surfeit of forex wont allow it to honour its debts. Salas defenestration is clear evidence of that !! Question is how do you get to an orderly default without getting some hefty outside financial help and offering a substitute payment plan supported by IMF type measures which the regime is very reluctant to even consider……., the whole country might go to the dogs simply because the regime cant bear the resulting loss of face that seeking the IMF’s help can cause them .

  3. The situation is pretty dire. The regimen that can’t even bring itself to make the most basic econonic desions is now confronted by all hell breaking loose. The sad thing is that the train left the station a long time ago.

  4. Nothing is possible with these Foreign Exchange Controls and no Rule of Law with this puppet TSJ. This is sure to be Humpty Dumpty’s fall! No horses or soldiers are going to fix anything!

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