Venezuela Quelling Default Talk Spurs Bond Surge: Andes Credit
Venezuela is rewarding bond investors with their biggest gains in five years as it quells default speculation. To Stone Harbor Investment Partners LP and Barclays Plc, the rally has just started.
The nation’s $4 billion of notes due 2027 have soared 11.16 percent since Oct. 27, the best three-day surge since January 2009, after the state oil producer made good on a bond payment, the government abandoned the sale of its U.S. refining unit and devaluation speculation increased. Venezuelan debt returned 8 percent in the last two days, compared with 0.7 percent for all emerging markets, according to JPMorgan Chase & Co. indexes.
The moves are allaying concern that Venezuela was running out of cash as foreign reserves hover close to an 11-year low, the economy shrinks and oil prices slump. Petroleos de Venezuela SA paid $3 billion of maturing securities two days after Finance Minister Rodolfo Marcos Torres on Oct. 26 ruled out selling Citgo Petroleum Corp., which has historically given comfort to bondholders because it would be the country’s most seizable asset in the event of default.
The PDVSA “payment was a relief for the market,” Donato Guarino, a strategist at Barclays, who has an “overweight” recommendation on Venezuela’s bonds, said by phone from New York. “Citgo is the only major offshore asset they had, so if it’s not being sold, that’s positive for bondholders.”
Venezuelan bonds are still the worst in emerging markets over the past 12 months.
Maduro Proposals
President Nicolas Maduro’s economic team has presented a series of proposals to be enacted starting Jan. 1, including devaluation and an increase in the price of gasoline, Caracas-based consultancy Ecoanalitica said in an e-mail to clients yesterday. The government’s Information Ministry declined to comment.
Yields on Venezuela’s 2027 bonds have tumbled 1.55 percentage points in two days to 15.57 percent, data compiled by Bloomberg show. They soared to a five-year high of 17.87 percent on Oct. 15 as the price of oil, the country’s biggest source of revenue, fell to a four-year low and Harvard University economists Carmen Reinhart and Kenneth Rogoff warned Venezuela is almost certain to default on its foreign-currency bonds.
After PDVSA’s bond payment on Oct. 28, Venezuela doesn’t have overseas debt due until March, data compiled by Bloomberg show.
‘Big News’
“The big news is that they made $3 billion of payments, which is pretty sizable,” Jim Craige, who owned the PDVSA bonds as part of the $50 billion he helps manage at Stone Harbor, said by phone from New York. “We still think they’ll continue to make payments. They recognize that the cost of default is enormously larger than the cost of making payments.”
Mauro Roca, a strategist at Goldman Sachs Group Inc., said Venezuela’s ability to pay debt will remain a concern as the country’s economy falters.
Venezuela’s gross domestic product will shrink 3 percent this year, the most since 2003, according to the International Monetary Fund. The nation’s reserves have dropped 8.7 percent in the past year to $20.2 billion.
Traders in the credit-default swap market are pricing in a 71 percent probability that the country will default in the next five years.
“The macroeconomic situation was already unsustainable, and that has only been aggravated by the decline in oil prices,” Roca said by phone from New York. “Unless the government adopts, sooner rather than later, a significant set of policies, the probability of default will continue to get worse.”
‘Breathing Space’
After falling to the lowest level since November 2010 on Oct. 15, Brent crude prices have gained 3 percent to $86.30 a barrel.
“This rally still has legs provided people get comfortable with the possibility that oil prices have hit something of a bottom at least until the end of the year,” Patrick Esteruelas, who helps manage $2 billion of emerging-market debt at EMSO Partners Ltd., said by phone from New York. “It’s a government that has done a lot of damage, but it’s a government that makes multiple adjustments to buy breathing space.”
To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Lester Pimentel, Bradley Keoun
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