LONDON/NEW YORK (Reuters) – Venezuelan government dollar bonds hit their highest levels since 2017 on Thursday and state-run oil company PDVSA’s debt also rose after international support for opposition leader Juan Guaido spurred hopes that socialist President Nicolas Maduro might be forced from office.
The corporate logo of the Venezuelan state-owned oil company PDVSA is seen at a gas station in Caracas, Venezuela September 24, 2018. REUTERS/Marco Bello
Guaido, who became the head of the National Assembly on Jan. 5, declared himself interim president on Wednesday, winning backing from the United States and most of the 12 members of the Lima Group, which was established in 2017 to peacefully end the crisis in Venezuela.
Venezuelan Defense Minister Vladimir Padrino said on Thursday that Maduro, in power since 2013 and sworn in for a second term earlier this month, was the “legitimate president” and that the opposition was carrying out a coup.
But Guaido’s recognition as president by a large number of countries, which includes Canada and neighboring Brazil and Colombia, “could allow the international community to freeze and divert assets and revenues, including proceeds from oil exports, from Maduro’s administration towards Guaido’s,” Barclays research analyst Alejandro Arreaza said in a note on Thursday.
Venezuelan and state-run oil company Petroleos de Venezuela debt prices started to rebound from rock-bottom levels after Jan. 5 and rallied further on Wednesday. The 2025 dollar bond dipped 0.37 cents on Thursday, having closed on Wednesday at 30.375 cents, the highest level since November 2017.
The PDVSA 2026 bond added half a cent on Thursday before dipping on the day, while still trading at levels not seen since April.
Strategists at Oxford Economics said holding Venezuelan defaulted debt “has become an attractive proposition once again.”
“In the worst-case scenario, bond prices settle towards the low 20s by year-end if Maduro manages to forcefully cling to power,” the note read. In a change-of-regime scenario, however, “most investors and analysts, ourselves included, expect a recovery value of around 50 percent.”
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A LONG WAY BACK
Venezuela has the largest crude oil reserves in the world and is a major supplier to U.S. refiners, but its economy has been brought to its knees by mismanagement and hyperinflation that is forecast to reach 10 million percent this year.
Maduro’s government began gradually halting interest payments on some $50 billion in publicly traded debt in 2017 while the government and state-owned companies also owe more than $8 billion in unpaid interest and principal payments.
Debt prices fell further in the second half of 2017 when Maduro publicly called for a debt restructuring, with many bonds left trading at a quarter of their face value.
The European Union added its weight to the push against Maduro early on Thursday, saying Venezuela’s authorities should respect the “civil rights, freedom and safety” of Guaido, but stopped short of following Washington and recognizing Guaido over Maduro.
Turkey and Russia have voiced their support for Maduro.
“For the first time there is a feeling that there is pressure coming from both outside and inside the country,” said David Nietlispach at Pala Asset Management, whose firm holds both sovereign and PDVSA bonds.
“It is a massive step if the Americans do not recognize the government anymore … On top of that, it looks like we have a candidate who seems to be able to unify the opposition.”
JUMPING THE GUN?
Despite the surge in bonds of the last few weeks, few Venezuela investors expect a resolution in the very near future. The issue for them is how much of the bonds any new government would pay back.
There will be much bigger issues to tackle first, such as ensuring the population has enough food and medicine again.
“There will be no debt restructuring for Venezuela until there is a regime change – that much seems clear,” said one sovereign debt restructuring expert, Cleary Gottlieb’s Lee Buchheit.
Once change happens, the first priority would be to address the humanitarian situation and then reinvest in the run-down oil infrastructure, both of which required large sums of money, he added.
North Asset Management’s Peter Kisler, whose firm bought up more Venezuelan bonds around six months ago, said the best-case scenario was that things start to move on that front in a year or so. It could be a lot longer though, and investors may not get all of their money back.
“Our general thinking is 30-40 cents is going to be the eventual recovery. The issue is that we are now getting there in some assets, but it’s still not certain yet that he (Maduro) is going to go.”
Additional reporting by Marc Jones in London and by the Caracas newsroom; Editing by Andrew Cawthorne and Paul Simao