Venezuela’s government is looking to reset relations with bondholders and other jilted creditors amid signs of a sanctions-defying economic recovery.
By Argus Media – Patricia Garip
Jan 18, 2022
In recent months, the Venezuelan economy has turned a corner thanks to rising oil production and exports, de facto dollarization and remittances from a 6mn-strong diaspora, international economists say. Hyperinflation has been tamed and GDP this year could shrink by as little as 3pc or even not at all, a modest feat that is eclipsed by an accumulated contraction of more than 80pc since 2013.
The more stable short-term outlook is mostly felt in the commerce and services sectors of Caracas, where scores of Venezuelan officials targeted by US and EU sanctions have few other places to spend money. Fuel shortages and blackouts persist but they are less severe than they used to be.
With the US-backed political opposition boxed in, President Nicolas Maduro’s government wants to re-engage the international financial community by signaling a willingness to restructure its obligations, with a focus on holders of sovereign debt as well as bonds issued by Venezuela’s national oil company PdV – a universe nominally valued at around $60bn.
“The lines of communication were never closed, but now they are more open,” a source close to the government tells Argus, acknowledging that a comprehensive restructuring and sustained recovery ultimately rest on a lifting of US sanctions.
With that possibility still off the cards, any buzz the government is hoping to generate has not trickled into the secondary bond market, despite some matching of buyers and sellers in recent weeks. Venezuela’s distressed debt is priced at only around 5¢ on the dollar and trading is thin, largely because the US government has a ban on US persons buying Venezuelan bonds, part of a punitive strategy that started in August 2017 with financial sanctions and which grew to cover oil in January 2019.
US institutional investors criticize the trading ban for tying their hands to the benefit of non-US bondholders, some of whom would probably rebuff any debt swap shy of a multiple of at least 10 times current prices anyway. For Caracas, the ban thwarts any comprehensive restructuring that would help to bring it out of the cold of US sanctions, its ultimate objective.
If the US were to lift the contentious trading ban, bond prices would likely rebound as Wall Street institutions waded back in, potentially bringing all parties back to the table to consider post-sanctions options. Aside from bond swaps, Caracas is promoting debt-for-equity deals along the lines of a transaction in the Dominican Republic last year. Eyeing private equity too, Uruguayan asset manager Copernico Capital Partners held a seminar today to discuss Venezuela’s “political-economic scenarios and debt perspectives”. Copernico also runs the Venezuela-focused Copernico Recovery Fund.
Since taking office a year ago, US president Joe Biden’s administration has been running in place on Venezuela while it focuses on other domestic and foreign policy priorities. And it seems disinclined to change course ahead of November midterm elections, mindful that anti-Maduro sentiment pervades among Venezuelan and Cuban-American voters in swing state Florida. The White House is especially wary of perceptions that it might be appeasing Maduro and abandoning the democratic opposition, regardless of how ineffective the current US policy has been.
Charm offensive
Venezuela’s incipient charm offensive follows the formal disbanding of a debt restructuring commission created in 2019 by a US-recognized interim government led by Juan Guaidó, whose mandate was symbolically extended in early January. The former commission’s prominent members, including ex-planning minister and Harvard economics professor Ricardo Hausmann, was already functionally defunct. But by “throwing in the towel” on Venezuela’s colossal debt, the Guaidó camp may have given Maduro an opportunity to step in, one veteran Venezuela watcher says.
A privileged subset of bondholders that carry PdV 2020 instruments – the last bonds to fall into default in 2019 – is blocked by the US government from laying claim to the collateral in the form of shares in PdV’s US refining subsidiary Citgo. In an increasingly disputed relic of Biden predecessor Donald Trump’s failed “maximum pressure” strategy, Citgo is controlled by the Guaidó-led opposition. The US Treasury Department’s suspension of the PdV 2020 bondholders’ authorization to execute their claim will probably be renewed again this week. In parallel, the bondholders as well as arbitration claimants led by ConocoPhillips and Crystallex are pressing their cases in US courts.
Venezuela has at least $150bn in debt, including bonds, arbitration awards and bilateral obligations led by China.
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