Venezuela, PDVSA bonds drop following the country’s regional elections on Sunday

By Rebecca Melvin

New York, Oct. 16 – Venezuela and Petroleos de Venezuela SA’s bonds fell about 2 points across the curve on Monday, with the front end underperforming, and virtually all of the bonds breaking through previous ranges following an unexpected victory for Venezuela’s ruling party in regional elections.

Of 23 state governor elections, 18 were victories for the socialist party of president Nicolas Maduro. Only five were won by candidates of the opposition coalition. Many including Eurasia Group, expected the reverse, with the opposition coalition winning the majority of the positions.

Most of the Venezuela and PDVSA bonds fell below 40 on Monday – a strong move that was more decisive than last week’s weakness when the Maduro government didn’t make interest payments for $349 million on five different series of notes, an East Coast-based trader said.

“People believe that these elections were a fraud and the international community will step up sanctions,” the trader said. However, they have not been able to produce evidence of fraud, which means there will be less room to justify sanctions, he added.

“Eighty percent of Venezuelans are against Maduro and he still manages to get most of the results,” so fraud is suspected, the trader said.

The results could spark not only international community sanctions but also mass street protests, Victor Fu, director of Stifel Nicholas & Co. EM sovereign desk strategy, wrote in a note on Monday. Nevertheless, it is unlikely that the results will be reversed, Fu said, pointing to continuing economic depression going forward.

In the meantime, none of last week’s bond payments had yet been paid as of Monday afternoon, and it was not known if or when those payments would be made.

“Most of the curve is well offered,” a trader said Monday afternoon.

The PDVSA 2020 bonds were seen at 83 bid, 84 offered. The Venezuela 2022 bonds were at 44 bid, 45 offered.

“The main issue is whether stepped up sanctions will cause a rebound in prices or not,” the trader said.

Stifel’s Fu said, “We believe that the election results are particularly negative for front-end bonds and could revive the convergence trade that prevailed from April to early August.”

If the coupon payments of Electricidad de Caracas, PDVSA 2027s and 2037s as well as Venezuela 2019s and 2024s can go through the next couple of days, the payments of PDVSA 2017s and 2020s could also go through, Fu wrote.

“We envision that Venezuela 7% 2018s outperformance over 2019s and 2020s and PDVSA 2021s outperformance over 2035s over the last two months will likely be reversed by a large portion,” he said.

The payments due last week included a $28 million coupon payment for the Elecar bond that matures in 2018, $81 million for PDVSA 2027s, $41 million for PDVSA 2037s, $97 million for Venezuela 2019s and $103 million for Venezuela 2024s.

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