Morning Commentary: Venezuela, PDVSA bonds react to Maduro’s call for debt restructuring

By Rebecca Melvin

New York, Nov. 3 – Venezuela and bonds of Petroleos de Venezuela SA reacted “swiftly” on Friday to Venezuelan president Nicolas Maduro’s announcement late Thursday that he wants to restructure the country’s debt.

Speaking during a televised event in Caracas, Maduro said he “decrees” a refinancing and restructuring of all foreign payments, but he stopped short of declaring default, asserting that a key $1.1 billion payment for the PDVSA 8˝% notes due Nov. 2 was being made.

The PDVSA 8˝ notes were 95 on Wednesday, well short of par, even though traders expected the country intended to pay back the bond. But some “still had doubts,” a U.S.-based trader of Venezuela and PDVSA bonds said.

As for Friday, the bonds were immediately trading flat, or without accrued interest, and the front end of the sovereign curve including bonds due 2020, 2021 and 2022 had dropped 20 to 30 points, one market source said. A second source said the whole curve was down 4 to 25 points, with the front end underperforming.

The market was volatile with some bid-ask spreads as wide apart as 10 points, but there was some recovery in some bonds by late morning.

PDVSA’s 2020 bonds had recovered some losses to trade around 70. Two weeks ago this bond was 83 bid, 84 offered.

The bonds were “reacting very swiftly’ to the announcement, a market source said.

“It was a very confusing announcement. We don’t really know what is going to happen next. There will be uncertainty for several weeks,” the source said.

Maduro said Thursday that Venezuela wasn’t going to be able to continue making payments on its debt, blaming the United States and sanctions imposed in August for bringing the country to this point.

In fact, Venezuela’s financial problems stem from earlier problems including failed socialist policies and a drop in crude oil prices, Venezuela’s primary source of revenue. The country has suffered severe shortages, including even basic food and medicine, in the face of the financial squeeze.

Despite the economic problems, Maduro and his predecessor Hugo Chavez, who died in 2013, had kept up payments on some $70 billion of debt up to this point.

Victor Fu, a strategist with Stifel Nicolaus & Co., said in a note early Friday that “Maduro’s plan to restructure the country’s debt after paying the PDVSA 17s’ $1.1 billion principal is counter-intuitive. We suspect that the Venezuelan government-related entities might own a lot of the front-end PDVSA 17s and 20s and might have bought more of these bonds at low levels after the constituent assembly referendum; otherwise this $1.1 billion could be used to buy essential goods for Venezuelan people, as Maduro claimed to cover ‘the necessities of the country.’”

The constituent assembly is a group of more than 500 Maduro supporters installed by a vote in July that many in the international community view as fraudulent. The powers of the constituent assembly override the national assembly of lawmakers and have helped Maduro concentrate power, causing the United States to label him a dictator and impose sanctions.

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