For most of 2017, complacency reigned supreme in the Venezuelan credit market. Portfolio managers felt like the country was out of the woods and, despite all the warning signs, they kept on buying short-end bonds and betting on a muddle-through Maduro-stays-in-power-and-keeps-paying-bonds scenario.

Now the holiday is over, and everybody is scrambling to get out through a door that’s getting smaller and smaller.

The reason?

It’s the Constituyente; or more specifically, the panic among investors about what could happen now, in the aftermath of that travesty.

Reuters’ Marianna Parraga and Matt Spetalnick published a piece on July 21st showing some of the worst yet to come. The US government is allegedly considering full-blown financial sanctions against the Venezuelan oil industry if the government installs the Constituyente becoming a fully authoritarian rogue state in an unprecedented escalation of the hostility between Miraflores and the White House. And as the doomsday clock ticked towards midnight July 30th Mr. Market more or less abandoned all hope.

It’s a freakin’ bloodbath out there

Take the Venny 19s, a highly liquid bond that’s popular among traders and investors betting on the ‘muddle-through’ scenario. In hindsight, the selloff started a while ago: prices peaked in early March and are more than 20 points down since then; year-to-date, investing in the bonds has led to a -28% principal loss, most of it since the second week of June.

What’s more worrisome, though, is that the selloff has accelerated in recent days. Over the past week, VENZ/PDVSA bonds fell by around -15% to levels not seen since May of 2016, even though oil prices actually bounced back strongly and current WTI futures are once again trading near the $50 per barrel mark.

“Ouch.”

Why is the market so weak? It’s easy to point out the culprit. The election of the members of the ANC (National Constituent Assembly, or La Constituyente for us locals) has put an end to hopes for a smooth government transition or a stable status quo. 

Instead, market players are now increasingly worried about a nuclear-level crisis scenario that sounded alien just a few days ago: sectoral U.S. sanctions on PDVSA and its overseas affiliates, forbidding the state oil giant from even doing day-to-day errands such as paying US suppliers with Dollars or receiving payments from cash-generating oil exports.

Maduro & Co has had it coming for years, though

First came the Obama sanctions of 2015 that led to the cheesy #VenezuelaIsNotAThreat backlash campaign. After several other rounds of (not that huge) targeted sanctions, a bomb landed on February of 2017: the country’s VP, Tareck El Aissami was accused by the US Treasury Department of drug trafficking. This was recently followed by an update of the OFAC’s sanctioned individuals list, targeting key heads of government, including some Chavista heavyweights such as Tibisay Lucena, Elias Jaua, Tarek William Saab and Iris Varela, alongside with little-known operators in charge of the nation’s public finances, like Erick Malpica Flores and Simón Zerpa.

In parallel, the year has brought a parade of legal disputes (V. Crystallex, V. ConocoPhillips, V. ExxonMobil) and controversial financial transactions (a Repo operation with Fintech Advisory, Goldman’s Hunger Bonds, and the toxic VENZ 2036 bond) that have tested the willingness of market players to remain invested in the external debts of a government that looks and acts more desperate by the day.

For a while now, market bears have feared that it’s only a matter of time before the US decides to escalate from its current limited sanctions at key individuals, considering the government’s rogue “I’ll do what I damn well please” attitude, as well as its proven ability of finding ‘alternative routes’ (caminos verdes) to continue operating relatively unscathed amidst the targeted sanctions regime.

As the dangerous game of chicken between government and opposition extends towards the July 30th deadline, Venny investors are bracing for the worst.

Ironically, it was Maduro himself who put the looming threat of sanctions over the country’s shoulders. The government is trapped in a situation of its own making. Nobody thought the constitutional crisis the Supreme Tribunal’s Sentences 155/156 might set it off, much less how they’d pave the way to four straight months civil disobedience and then to the Doomstituyente upon us.

Too late to defuse that bomb, Zapatero.

The Nuclear Option and market implications

The consensus among investors is that, of all proposed US macro sanctions, the blockade of US dollar transactions by PDVSA is by far the deadliest. Not only will it severely disrupt the flow of petrodollars in about three months (i.e., the time between closing an oil sale and actually collecting the cash), it would also forbid PDVSA from making debt repayments on dollar-denominated debt. Several coupons are due in August, so if the US government effectively goes on in this course, total uncertainty would surround the Venny bond market.

It’s likely that a transactions ban would be shortly followed by a technical (yet equally traumatic) credit event after the grace period expires and PDVSA finds itself still unable to wire any coupon payments, despite having both the willingness and the capacity to service those debts.

What’s curious about the free fall in bond prices is the timing and lack of volume behind it. Even though the impasse between government and opposition peaked right before the Constituent Assembly election, the stage has been set for weeks and the newsflow that’s driving the market action is not precisely new.

I’ve learned to fear and respect market crashes with very few bonds changing hands, because most of the time they imply that the smart money is heading for the exits as quietly as it can. The price insensitivity of sellers despite bonds getting to double-digit % losses corroborates the theory, in my view.

Damned if you do, damned if you don’t?

Bondholders should be even more scared than Maduro at this point. A government threatened by sanctions and financial blockades is ripe for breaking the explicit contract of external debt financing and servicing. Maduro & Co. might just stop paying altogether, using their old’n’trusty ‘Economic War’ excuse. The worst part is that, this time, they’re not wrong.

On the other hand, the opposition has repeatedly said they intend to seek a friendly restructuring of the nation’s external debt pile. However friendly, though, it’s gonna include a sizeable haircut, worsened by every year that passes without significant macro reform and for every ICSID indictment that adds to the list of debt commitments that any Venezuelan government, no matter their political stripes, will have to take care of to avoid total economic and political isolation.

So, you think Venny is out of the woods? Are you looking to ‘buy the dip’? Or maybe try to pull off another Bachaquero of Wall Street trade with the Nov 2017 maturity?

Think twice.

53 COMMENTS

  1. Good. Venny traders have nothing but my contempt, no matter how removed they think themselves to be from the situation that makes them an attractive proposition in the first place. I hope they all skin their noses on them.

  2. Please explain how Citgo would be immediately affected?
    Citgo buys less than 50% of their oil from Venezuela.
    Assuming that the refinery and retail operations are still profitable, would sanctions shut down the pipeline of profits returning to Venezuela? Would Citgo be forced to suspend operations?
    I do not understand if Citgo would be considered a US based company and forbidden from doing business with Venezuela or a Venezuelan company under sanction itself.

    • A transactions ban would definitely affect Citgo right from the start (IMHO) as it is an US-based entity which deals in US Dollars.

  3. Dialog, rule of law, and simple reason have been exhausted. Venezuela is now a rogue state held in place and RUN by Las Fuerzas Armadas de Ocupacion Bolivarianas. They have proven to be ideologically committed to a murderous cause.

    Armies are defeated by direct military action or by strangling its supply lines.

    The ‘escuderos’ are not going to beat the military in a direct confrontation. Cardboard shields versus live rounds is simply unfair. Of course they make the point of a violent dictatorship at a cost that, personally, I find morally dubious because it seems suicidal. However, they will evolve to an urban guerrilla as we saw with the more sophisticated explosions seen yesterday in Altamira. Moreover, as seen late last week in Merida, the military needs to escalate the magnitude and violence of its military tactics to project power. This will stretch and embarrass the Military but it will not defeat it.

    An economic debacle will strangle its supply lines. The impending hyperinflation will devastate Venezuela at a biblical level. The military will have trouble feeding its troops, meeting payroll, resupplying itself with weapons and, if I were to guess, fuel.

    As committed as the military may be, Chavismo’s decay is heavy within the military too. It has deep structural problems like the over abundance of generals, in addition to the systematic corruption, drug trafficking and human rights abuse. This institution, being the buttress for Chavismo, makes me doubt its effectiveness.

    The next chapter is the unfolding of the economic situation with the possible accelerant of economic sanctions. Hopefully, the people do not lose hope and continue to show their anger in the streets.

  4. The DolarToday exchange rate is 11,186 BsF to the dollar- a 10% decline since Friday.
    The economic crisis is accelerating.

    • Funny Net. You really seem to be obsessed with me. If I wouldn’t have been collecting interest for the past 10 years, my legs would be bloody indeed. However and unfortunately for you, that is not the case.

      If they default, I am happy to go to court, sit tight and wait.

        • Haha!

          It has been bloody, but less so than say January 2016. It can get much worse (both for bondholders and for the avg. person living in Venz).

          And it’s also astonishing to see people still advocating for default, not realising that what some are looking for is to cash-in CDS, buy bonds at even lower prices and take the country to court. Bla bla media keeps repeating that vultures funds are buying bonds when the reality is very different. Vulture funds wait for a default to take place (of course that if one is in Hausmann’s Lala land that has already taken place), prices to be in the single digits, and then buy. They don’t hold for a number of years…

          • VT is obvious and vocal proof there is always a selfish prick around to take advantage of a social problem, no importa death and sickness. He is the face/”name” of savage capitalism that drives Chavismo. F’ing prick

          • Gringo2 – Do you know what a CDS is? Just curious. It appears que no comprendistes ni pizca de lo que dijo. He is going over facts.

            A man may not like it when the engine in his automobile stalls, but cursing automobiles doesn’t seem to do much to get it started. He must look at causes and effects, whether he likes them or not. Maybe the gas tank is empty? Maybe the radiator lacks water? A man may not like it when he has little food, and lives in a little house, but voting for Chavez – as emotionally correct as it may have seemed – somehow didn’t work out.

            He never understood economics and money, either. What is necessary is to look at the world as it is, accept the reality that an automobile is a capitalist product, if you must characterize it that way, and understand how it works, and be grateful you have one. … A world, that is. A country other than a socialist one to live in (and abuse). The world runs on capital, not “feeeeelings”.

          • Gringo, yes, I am a capitalist, and I do have morals and principles (“feelings if you wish). I left Venezuela, leaving behind a high $ job in a beautiful place, with great friends, rather than directly support the regime, now dictatorship with my knowledge and experience.. and I did just fine elsewhere. VB could do just fine elsewhere as well.. I won’t pick over the bones of the poor while supporting these narcos.. If you do, well that says a lot about your character. Hell, why are you even here.. trolling?

      • Venny Trader –

        A prior CC article cited total Venezuelan debt as around $140 billion. https://www.caracaschronicles.com/2017/01/31/debt-sustainability-30000-feet/

        The NYT pegs it at $60 billion (government and PDVSA). https://www.nytimes.com/2017/04/12/business/venezuela-oil-debt-payment.html

        Which number is closer. if you know? (I don’t follow bond markets at all, it just seems to me that the rumor that there are $300 billion in embezzled funds floating around somewhere, and the statement from the Trump Administration that monies recovered should be returned to the Venezuelan people, opens the possibility that a new V. government could use that to call their bonds at rock-bottom prices and have the last laugh on everyone, including everyone from Goldman to El Finado. Hopefully, there won;t be blood on the streets if that should occur, but recovery of funds might motivate Goldman to go looking for them … good for their clients and all.)

        • Gringo,

          Both figures are “correct”. I believe $140bn. includes other debts beyond actual bonds whereas $60bn. would just be a sum of the notional amounts of both Venezuela’s and PDVSA’s outstanding bonds.

          But the most important question that we need to ask ourselves here is, does it matter? Is it correct to use those figures for any analysis at all?

          First of all, I am skeptical of the traditional economist approaches, debt/GDP ratio sustainability, bla bla bla. Under that analysis, not a lot of countries will be “sustainable”. For instance, is the Spanish debt sustainable? Very unlikely. Yet there they are, issuing more and more debt every year because the market allows them to. Greece? The same. Countries that over the past few years have increased their debt exorbitantly to fuel GDP “expansions” of 2-3%…

          Second, it is a terrible mistake to bundle debt, even adding up PDVSA and Venezuela’s debt is a mistake, because they all have different conditions and circumstances. But of course economists and anal-ists want to add it up, otherwise, they can’t compute their neat metrics and carefully craft their narratives around these. And let’s not even start to talk about “importers” CADIVI debt, airlines debt, etc. etc. Funnily enough, some economists have a double standard with this: they have no problem saying that the fixed F/X system is crazy (which I agree with), that the rates imposed were artificially low (which I also agree with), but then they insist in that the govt. needs to pay those people/firms for debt contracted at those crazy rates (2.15, 6.15, etc). When you start analysing in detail all the claims of economists about Venezuela you see that there are so many holes in their reasoning and their logic that it is pretty much a waste of time to start debunking each of the various claims (I have more interesting things to do). And the problem is not about the economists being Venezuelan or talking about Venezuela, it is about economists themselves. It is about economics as a profession and its practical use in modern societies. As written by Nassim Taleb reflecting on the thoughts of an economist, Ariel Rubinstein, on the matter: “…economics is like a fable – a fable writer is there to stimulate ideas, indirectly inspire practice perhaps, but certainly not to direct or determine practice, theory should stay independent from practice and vice versa – and we should not extract academic economists from their campuses and put them in positions of decision making. Economics is not a science and should not be there to advise policy”. Sorry guys…

          To me what matters the most at this stage is the actual bonds due this year and perhaps the next couple of years. The rest? It can be refinanced, it can go up to par, it can go down to 15% and bought back, who knows. What is important is that PDVSA has maturities coming up in the next three months and that there needs to be money to pay for it. When one is getting paid current cash yields of ~25-30% for something that costs 30-35%, the upside risk is larger than the downside risk, which is where you want to be, not only in investments but in life altogether. Now compare those prices and yields with the rest of the state-owned oil co’s for example: Pemex, Petrobras, etc. etc. The outcome is very very different.

          Now people will start attacking me for thinking I don’t think in the “long-term”, that this is what put the country in the state it is in the first place, etc. etc. All bla bla because they can’t understand the matter being discussed. It is more simple than they think.

          To your point on recovery of money: I wish that that could happen. I am not sure how feasible it is. But $300bn. is a plausible figure given how much CADIVI, SAIME, DICOM, etc looting has taken place.

          • Venezuela no longer has a working economy , nor a credible govt …. its one source of revenues …oil …..is in deep price depression and the industry that produces it operationally and financially in shambles…growing worse , the mountain of debt is of course unpayable, that payment of bond debts continue for the time being is no promise in such scenario that it will continue to be paid in the future …….., venny bonds are no longer a source of new revenues for a bankrupt economy…….., in such conditions sooner than later a total restructuring of the foreign debt will have to be attempted (with or without a precedent default) but if by people that have shown again and again their incompetence at managing the countries finances……….then it might result in something that is too little too late , if a restructuring is needed why havent they attempted it so far ??, maybe because they are cowards and wont take the bull by the horn but only engage in attempts to gain a little time by desperate measures that just prolong the agony without doing any thing substantial to address the basic issues……,to compare Venezuelas financial situation with that of other countries is naive , there are no precedents , Ricardo Haussman recently wrote a piece on this issue ……academic economists are not infallible , neither are back of their seats economists ……but in Venezuela right now the writing is on the wall for anyone with the minimum of common sense to see……we are for all practical purposes broke ………and no chance that under this regime there will be any credible effort at starting to attempt to scape our dire situation….

          • Venny Trader – Fine analysis, thank you. There may be more debt accumulated in smaller quantities, as Luisa Ortega stated when she said she has thousands of cases (I couldn’t find the link) in her records. The NYT is to the left but authoritative, and Frank Muci’c article is depth from street level, so I really wondered about the “discrepancy” there. There’s also the “debt” owed to maintenance of oil infrastructure, not to mention professionals who have left the country, and trying to quantify that …? (It could be done, analyzing production decline and replacement cost of inputs of production.)

            I disagree that economics is not a science, and cannot be used for policy, but the essence of it is towards free markets, but I have seen the misuse of macro numbers as well (e.g. times interest covered in muni markets doesn’t tell the story of demographics and future capital requirements – but there I’ve drifted into long-term, and you might not find it relevant!). It is fascinating how bond traders maintain the smooth function of free markets. Bond desks, I have heard, want the number, the order, the quantity; the rest is science-fiction.

            thank you for the clarifications and thoughts. I read it twice. Very cogent analysis.

  5. Either the resistance and nationalistic leadership step up their messaging to guide the coming zombie hordes of hungry and dispossessed towards the occupation forces enclaves and positions, or they will roam the streets aimlessly and randomly.

    Biblical dimensions is right!

    • Yes luis, now is a time for an awakening. Better channel the zombie hordes now.

      Everbody knows Diosdado and crew control the divisas. Todos saben la vaina aki en Venezeula. Only people who watch Con el Mazo Dando and VTV will blame the gringos. The rest will blame miraflores or steal what they can. We have already been living under sanctions for too long. We need to tell the zombie hordes what is to come and who really is to blame.

      I think the significance of 30J, above all, is that this government is a complete farce and the whole world knows now.

  6. Fact is, Maduro cannot last no matter how much power he assigns himself without SOME money pouring in. Regardless of the way the bond saga plays out, the US can largely disqualify Venezuela from participating in the world market, which supplies the country it’s financial lifeline. Expect sanctions of some sort within a few days. Once international banks refuse to let Maduro to use their currency for oil trading, or for anything, he can’t even unload his supposed 10 billion in gold reserves and get back anything but some funky currency he cannot even exchange. He must have forgotten that 90 plus percent of needed goods are imported, and nobody is going to accept Bolos as method of payment. Maduro only thought he was immune to what other countries thought and felt. He’s about to feel it – big time. With the whole civilized world against him, even bond trading will be extremely tricky if those transactions cannot be executed in dollars or some viable currency.

    It may take a while and much suffering, but socialismo is buggered in Venezuela.

    • Yes. All of Maduro’s US assets are frozen. Well, it beats throwing a bunch of tomahawk missiles at an empty airfield in Syria.

          • MRubio, while you and Lorenzo stroke your aging baby boomer at the golf club lexicons, maybe you can explain to me this: why is the Commerce Department leading the charge on US sanctions and not the State Department? Where’s Secretary Tillerson, the guy who knows about how oil works?

            To be clear, I have no problem with sanctions on Maduro. He will probably have to travel with wads of cash now, if that is not already his practice. Also, I don’t think now is the time for an economic embargo on Venezuela, so in that respect I’m fine that Trump is not delivering on that particular threat. And it’s not like there’s a loss of credibility that’s going to happen in this case.

    • If it makes you feel any better (and it shouldn’t), we have something like 45 a day in the US, although we do have ten times the population as VE.

      • We also have about 36,000 a year traffic fatalities. https://www.autoblog.com/2016/10/07/us-traffic-fatalities-rise-10-percent-2016/ The count for the first half of 2016 was over 17,700. By comparison, we had 58,220 military fatal casualties in Vietnam. As of June 29, 2016, the U.S. has had 4,424 fatal casualties as a direct result of operation Iraqi Freedom.

        I may give up driving …. A NASCAR driver was once asked if driving 200 mph scared him! Paraphrasing here, he replied something like: “No, what scares me is driving on city streets because there are so many people who don’t know how to drive. On the track, you’re with competent professional racers.”

        This post goes in conjunction with the topic, and understanding economics and finance – and in the case of Venezuela, understanding that socialism is a fatal infection.

  7. In the news release from the US Department of Treasury, per the sanctions against Maduro, they stated: “The creation of the ANC follows years of Maduro’s efforts to undermine Venezuela’s democracy and the rule of law.”

    The problem all along is that Chavez, then Maduro, thought they WERE the law. But if you have to do business internationally to sell oil etc., there is the matter of international law, which Maduro is clearly not.

  8. The US is asking those ANC guys “elected” to not take office. Seems those are the next in line for sanctions. Then they will move to PDVSA sanctions.

  9. So can we get a photo of the two big macs please?

    24 hours post-prostituyente and still no sign of mass revolt. What if Raul knew Venezuela better than we did?

  10. Hot off press: Is Marijuanita going for a Venezuelan Maidan, Ukraine style?? In this scenario however, the people defend the AN from the GNB and colectivos? Hope it turns into a permanent Maidan and guarimberos can beat down cabeza e mango and crew daily, but I have my doubts.

    http://www.el-nacional.com/noticias/oposicion/oposicion-llama-defender-parlamento-dia-que-intenten-imponer-anc_196383

    Now, the government knows whats up and will do anything to prevent it. Yet this government has shown they do not have el pueblo anymore and 30J was a new low for them. So that changes things a bit. If people from the West support this, this could be real interesting. But might need Oscar Perez help get supplies past colectivos in his helicopter…

    Or maybe they have a military support on that day…doubt it…

    Who knows at this point.

  11. If Ramos Allup is serious about entering elections with this gang in charge, then he’s officially out of his fucking mind. I can’t believe such a story is true.

  12. Ramos Allup being a Derwick agent for a long time, he blew his covers years ago when he went extra hard at Thor Halvorssen, that old men an AD should be cast out if he really was sugesting to wait for the regional elections, i mean, after all the fraud we just witnessed yesterday only a person on a payroll would say wait lets participate in a election with this CNE.

  13. So without US light crude, and effectively a loss of half of their market, where do they go to sell it? Where do the go to get light crude? Importing it from the Middle East will drive up costs significantly. Their market price for VZ oil will shutter.

    Worse yet, where do they get support for their equipment and rigs?

    US oil companies hold nearly all the service contracts for the heavy oil rigs.

    This is going to get so ugly even a drunk blind man is not going to be tempted to take them home after closing hours.

    I don’t believe China is working or servicing the fields with the nasty mud-oil crude.

    And with hurricanes right around the corner, shipping is going to get even more troublesome.

  14. Cannuck, other than Tillerson’s involvement in Exxon’s suit against the Chavez regime, I don’t know why Commerce is taking the lead and don’t give a rat’s either as long as every measure possible is applied to end this reign of terror and failure.

    What gets tiring are your constant shots at Trump that add nothing to the discussion of Venezuela and actually detract from it. We get it. You hate Trump. Give it a rest or perhaps take your show to one of the 3 thousand US political forums to be found elsewhere.

    • Canucklehead just doesn’t hate Trump, he has a case of unmitigated contempt for Republicans.

      I ask myself similar questions about the supporters of chavez and the supporters of the (current) republican party. Are they the beneficiaries of a corrupted system, the uneducated and manipulated, or a combination of both?

      Why is it so quiet around here?

      What I find ironic about Canucklehead’s mantra of “uneducated…manipulated..Republicans” is that a leading factor in my turning from a progressive of the left into an evil right winger was purchasing and reading Carlos Rangel’s Del Buen Salvaje al Buen Revolucionario when I was working in Venezuela. Mixed bag, Canucklehead: he got taken in by the Allende crowd, but the Sandinistas didn’t fool him.

      I am glad to see that I am not the only one Canucklehead pisses off, though I have pretty much stopped replying to him.

      http://cedice.org.ve/wp-content/uploads/2014/03/Del-Buen-Salvaje-al-Buen-Revolucionario.pdf free for the downloading

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