Venezuela inches closer to a formal default

Venezuela inches closer to a formal default

Ruling on credit default swaps seen this week as PDVSA payments are not received

Venezuela is closer to a formal default on its debts, with bondholders reporting no sign of full payment that was due last Friday while a derivatives industry body will rule whether credit insurance should be paid.

Venezuelan president Nicolás Maduro last week announced that the country would have to restructure its foreign debts, but promised to make one last $1.1bn payment on a bond issued by PDVSA, the state oil company. The payment was due last Friday, and while newswire reports suggested that “most” of the money had been transferred, one of the biggest bondholders said that the money had yet to arrive.

“There has been no official communication on the payment delays. It is really odd that funds haven’t been received with sufficient time to process if the funds were sent last week as officials indicated,” said Siobhan Morden, head of Latin American bond strategy at Nomura.

With Venezuela already technically in default, the International Swaps and Derivatives Association was set to meet this week and decide whether PDVSA has triggered a “credit event”.

Such a ruling would trigger payment on credit default swaps, instruments used as insurance against a default written on the PDVSA’ bond.

ISDA’s determinations committee — made up of representatives of the finance industry, from companies including Goldman Sachs, JPMorgan, Pimco, Elliott Management and Citadel — on Wednesday evening decided to hear the case.

“We’re not sure when or how long this will take, but we wouldn’t expect it to take too long,” noted Stuart Culverhouse, chief economist at Exotix. “It might be possible to argue that Venezuela made the payment but this was not transferred to holders because of problems in the payment chain, although CDS were triggered in Argentina in 2014 in a similar situation.”

The prices of CDS tracking Venezuela and PDVSA’s bonds have skyrocketed from already elevated levels this week. Investors believe that Mr Maduro’s cryptic comments about “refinancing and restructuring” Venezuela’s foreign debts will in practice mean that the country will endure a full default, and thereafter face financial purgatory by US sanctions that make a restructuring very tricky.

ISDA’s ruling on default is only relevant to the CDS. The process surrounding declaring default on the PDVSA bonds themselves is different.

Bondholders are likely to be more patient on declaring a default than holders of CDS — who typically want to get paid as soon as possible — because legal clauses would mean PDVSA would be in default on all its bonds, not just the 2017 security.

Venezuela and PDVSA are legally separate entities, so PDVSA’s default would not trigger Venezuelan CDS or a Venezuelan sovereign default. But there is a myriad of other overdue interest payments by both borrowers, and unless the money appears soon then Venezuela will be in formal default on all its international bonds.

Venezuela has summoned bondholders for negotiations in Caracas on November 13, but the talks are expected to yield little. Indeed, US investors will be wary of even attending, given that the person leading the Venezuelan side of the talks, vice-president Tareck El Aissami, has been sanctioned by the US Treasury as an alleged drug smuggler.

None of the big rating agencies have formally declared a default yet, but S&P Global Ratings on Monday lowered the country’s rating to CC, the second-lowest rung possible, and said there was a 50 per cent chance of a default within three months.

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