Weak EM sees slight recovery into close; Venezuela, PDVSA bondholders eye Monday meeting

By Rebecca Melvin

New York, Nov. 10 – Emerging markets remained soft and saw further spread widening on Friday, although the market came back a little bit into the late session, as widening trends remained in place, namely geopolitical fears tied to the Middle East and elsewhere and investor caution related to preserving profits achieved this year as year-end comes into view.

Lebanon five-year credit default swaps hit 630 basis points, and Lebanon’s bonds took another leg lower in the early session. The Lebanon sovereign curve was punished severely this past week with inversion apparent, a London-based trader said.

Saudi Arabia was active again, with some buyers stepping in on weakness. The long end including the Saudi 2046 and 2047 paper was 28 bps to 29 bps wider on the week.

Bahrain was notably weak on Friday, with spreads wider throughout the curve, and Oman saw some early buyers turn seller again in the late going.

From a week to two weeks ago, “things are worse, and while there are still some things in the pipeline and syndicates had had high conviction, they will be coming in on Monday looking for stabilization and improvement,” a London-based source said.

There are a few deals roadshowing, but market tone has changed, with virtually all the deals that priced in early November trading wide to reoffered levels as of Thursday, the source said.

Tensions in the Middle East had been a catalyst for weakening and remained in the cross-hairs of investor concern.

Venezuela and Petroleos de Venezuela SA credit was on the upswing of what was a roller coaster week at extremely distressed levels. The Venezuela and PDVSA debt market rallied on Thursday after PDVSA’s $1.1 billion principal payment on notes due Nov. 2 came through a week late, but then it fell again on a default announcement by CA Electricidad de Caracas (Elecar)’s trustee, a market source said. It rallied again however when Elecar announced that it had paid the bond.

Corporacion Electrica Nacional (Corpoelec) defaulted on its $650 million of 8˝% notes due 2018 by failing to pay interest Oct. 10 within the grace period, according to trustee Wilmington Trust, NA on Thursday.

The notes were originally issued by Elecar and assumed by Corpoelec in 2012 after a merger.

Most prices of Venezuela’s sovereign curve went from the low 20s to the high 20s, a Connecticut-based source said regarding Thursday’s session.

Venezuela’s 2018 notes are over 30, and PDVSA’s 2020 notes were well bid at 79.

The prices are still far away from levels seen before Venezuelan president Nicolas Maduro announced last week that he wants to restructure the country’s international debt.

On Nov. 13 a widely anticipated meeting of Venezuelan bondholders will be held. But not everyone is optimistic regarding the efficacy of that meeting. It is understood that the U.S. government will allow negotiations to proceed, despite sanctions prohibiting such dealings in place, if the restructuring plan is approved by Venezuela’s opposition-controlled National Assembly.

Still, analyst Victor Fu of Stifel Nicolaus & Co. Inc. said, “We do not hold big hopes on Monday’s bondholder meeting. It likely will be just an information session, in which bondholders probably would be more interested in whether the past due coupons will be paid than how a restructuring can be done.”

This weekend coupon grace periods expire for the Venezuela notes due 2019 and 2024 and the PDVSA notes due 2027.

In regard to these coupons, Monday is crucial because it will determine whether the sovereign and its state-owned oil company default on those coupons, Fu, Stifel’s emerging markets sovereign desk strategist, said.

While the Elecar coupon transfer news has raised the likelihood that the 2019, 2014 and 2027 bond coupons will be paid, it is Monday’s meeting which will be more important respective of these coupons, Fu said.

In addition, Fu has low expectations for Venezuelan debt restructuring under the Maduro regime, because the proposed plan is unlikely to include meaningful political or economic reforms and only seeks to re-profile coupons and extend maturities.

“We think Maduro’s Plan B is to default on foreign bonds to prop up Chavistas heading into next year’s presidential election while seeking greater sponsorship from China and Russia,” Fu wrote in a note published on Friday.

PDVSA bonds have recently outperformed Venezuela bonds, which may be driven by expectations that Venezuela could keep PDVSA afloat while defaulting on the sovereign.

Overall, the weakness evident in emerging markets has not occurred in vacuum. Other risk assets continued to slide on Friday; stocks were lower, and underlying yields crept higher.

It is the end of a strong year, and negative catalysts are going to have significant repercussions, one market source said.

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