Caracas Chronicles

Photo: Latin Finance, retrieved.

Venezuela and PDVSA bonds are hot, as the political crisis breathes new life into the so-called “regime-change trade.” It’s the third time in the Maduro era that a period of increasing social unrest brings a bond market rally. The two previous hope-induced spikes—amidst nationwide protests in 2014 and 2017—ultimately fizzled along with the protests.

Just how hot are vennys right now?

• Bond prices are up between +35 and +68% month-over-month.
• PDVSA bonds have outperformed VENZ on a 2-1 ratio on average.
• PDVSA low dollar-value bonds are trading at 25 cents on the dollar, up from 15 cents at the start of the year.

While we’re skeptical of sovereign bond prices as a leading indicator for political affairs (since foreign investors have little informational advantage over a well-informed local citizen), there are some remarkable differences in this ‘regime-change’ rally.
This is the first sign of broad-based bullishness in Venezuelan bonds since the country stopped paying its external debt in 2017 and, by far, the biggest gain for the bonds since trading in default.

There’s no reason to believe investors’ assessments  of recovery values under the status quo have improved, but rather that the odds of a successful debt restructuring in the near future have increased. As this could only occur under regime change for many reasons—chief amongst them the U.S. sanctions regime that prevents the Maduro government from issuing new debt securities—it seems that investors are putting their money… where Guaidó is.

It’s no secret that a new government in Venezuela is gonna need financiers, and the opposition seems to be playing accordingly. According to the analyst consensus, there are two ways in which the National Assembly-led transition is aligning their interests with bondholders.

Venezuela and PDVSA bonds are hot, as the political crisis breathes new life into the so-called “regime-change trade.”

One line of thought claims that, since the U.S. no longer recognizes Maduro as the country’s president, Venezuela will not able to sustain cash inflows from oil sales to the U.S. in the political status quo, as American refiners would likely abstain from taking unnecessary reputational risks by continuing to deal with an unrecognized government. This could lead to the same result as a direct oil embargo—but with a much more palatable form—and represents a key bargaining chip for Guaidó’s camp in the coming political struggle.

Secondly, international support for the opposition-led National Assembly (in both diplomatic and political form) has never been so widespread. Several key regional players (U.S., Brazil, Colombia, Argentina, Chile) and EU officials have endorsed Juan Guaidó as the country’s interim president; meanwhile, Russia and China have stayed quiet throughout the political crisis, sidestepping the fallout from a direct endorsement of Maduro. From a bondholder’s perspective, the potential benefits of siding with the opposition in the current crisis far outweigh the—nil or even negative—payoff of staying quiet and continuing to accumulate defaulted coupons, with no end in sight.

Lingering Questions

Do recent events imply increasing odds of an oil embargo by the U.S.?

No.

We side with the view shared by the majority of the opposition—as well as American refiners—that a unilateral oil export ban will not advance U.S. policy objectives, since Venezuela’s allies (Russia, China, India) would likely continue buying the country’s oil; besides, the political benefits Maduro could reap from such a measure are endless, as it fits his stale ñángara discourse like a glove. Therefore, we deem a direct imposition by the White House unlikely.

It’s no secret that a new government in Venezuela is gonna need financiers, and the opposition seems to be playing accordingly.

However, we are confident that the loss of credibility by Maduro would lead U.S. refiners to abstain from buying Venezuelan crude oil and avoid reputational risks. In particular, we think Valero Energy (the only remaining U.S.-based client, besides CITGO) would stop buying Venezuelan oil altogether in the following months and as long as the political crisis persists.

Since Maduro is no longer recognized by the U.S., does that mean only Juan Guaidó’s new government has access to Venezuelan assets held in the States, including CITGO Holding?

Yes, but this has implementation issues.

It’s very likely that the Maduro government will face distress managing its accounts linked to PDVSA and will have any attempts at withdrawing liquidity or receiving oil sale proceeds in coming days blocked. It’s not guaranteed, however, that the new government will have direct access to all assets and/or gain operational control over CITGO.

While it’s clear that a measure to transfer ownership of Venezuela’s offshore assets is consistent with recognizing the National Assembly as the sole legitimate authority in Venezuela, there’s a clear gap between intention and practical execution. Who would have access to the money? What can they do with it? Which guarantees to prevent the funds from being stolen can be put into place?

It’s a very delicate situation that calls for a standstill until the resolution of the political crisis. Therefore, we think that, while two governments (Maduro, Guaidó) remain de facto contesting their legitimacy claims, the U.S. would attempt any side from exerting total control over the nation’s assets abroad.