Thursday, January 21, 2016

Oil rout raises fears of Venezuela debt default

Venezuela’s President Nicolás Maduro speaks during a meeting with entrepreneurs and representatives from the business sector in Caracas on Tuesday, in this handout picture provided by Miraflores Palace.

Caracas requests OPEC meeting as emergency decree dominates domestic politics

NEW YORK — Slumping crude prices have investors and analysts warning of a potential messy default in Venezuela, with state-owned oil company PDVSA owing some US$10 billion in external debt payments due this year.

With crude hovering around US$28 per barrel, Venezuela — which yesterday requested an emergency OPEC meeting, according to reports — could have trouble satisfying its obligations.

Barclays said yesterday the country will have difficulty avoiding a “credit event” in 2016 — and that is based on the bank’s forecast of US$37 oil, almost US$10 higher than current prices. That sentiment seems to be widely shared in the market, even though President Nicolás Maduro assured the National Assembly last week that Venezuela would continue to pay what it owes.

Four delegates from countries in the OPEC cartel cast doubt on the idea that an emergency meeting would take place, dashing hopes of a raise in the price of oil. OPEC’s Gulf members including Saudi Arabia have opposed earlier calls for emergency meetings.

Saudi Arabia and its Gulf OPEC allies led a change in OPEC policy in 2014 to defend market share against higher-cost rivals, rather than cut supply to support prices. OPEC at its last meeting, held in December, rolled over that strategy. OPEC is already pumping oil at close to record levels, even before any extra Iranian crude reaches the market. The next scheduled OPEC meeting is not until June.

‘Not when, but if’

“It is a question of when, not if,” said Russ Dallen, a partner at Latinvest in Miami, referring to the possibility of a default. “The only thing that could change that is a sharp recovery in oil prices, and/or a bailout from Venezuela’s friends in China, Russia or Iran.”

Venezuela was able to stave off its troubles last year, leaving no stone unturned in efforts to drum up short-term financing. It filled gaps through cashing in PetroCaribe loans at a steep discount, gold swaps and issuing high-yield bonds through PDVSA’s US subsidiary Citgo. But many of these sources are now exhausted, and analysts think the country has few options left as the sovereign and PDVSA face some US$10 billion in bond payments this year.

“The ability to pay is definitely getting trickier day after day,” said Yong Zhu, senior portfolio manager at DuPont Capital Emerging Markets Debt Fund. “If oil stays where it is, Venezuela has a big gap to fill, and no one knows how long oil prices can stay where they are.”

Much of the debt coming due this year was issued by PDVSA, not the sovereign, and does not carry collective action clauses (CAC) — which could make a sticky situation even more difficult. Without CACs — which allows a supermajority of bondholders to agree to debt restructuring that is legally binding on all holders of the bond — Venezuela could be held hostage by minority investors, said Pablo Venturino of investment firm White-Bridge Capital.

“In the case of PDVSA, you don’t have CACs,” said Venturino who worked on one PDVSA’s largest issues in 2007 when he was a banker with ABN AMRO. “It is something you need to analyze and hasn't been reflected in the price.”

PRICED IN

For the moment, the market seems confident that Venezuela will meet its next commitments: US$2.228 billion in principal and interest on PDVSA and Venezuela bond payments due next month.

The sovereign’s 5.75 percent 2016s, which have a payment due next month, were trading at a mid-market price of around 92 cents on the dollar yesterday, up close to five points since Friday.

“We thought it was oversold, so we bought last week at a price just under 86,” Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management, told Reuters News. “We believe that payment risks were overstated.”

But debt maturing later in the year is getting a much cooler reception in secondary trade. The PDVSA 2016s, which mature on October 16, are trading at mid-market levels. And with crude at such depressed levels, the view on the horizon remains grim.

According to Barclays, even if oil hits US$37 — and Venezuela cuts imports by US$7 billion and musters up US$6.7 billion in financing — it will still need to raise US$22.7 billion in 2016.

“Economic change is not happening fast enough, unless (President) Maduro announces some measures via (last week’s) emergency economic decree,” said Siobhan Morden, head of Latin American strategy at Nomura, noting that the opposition now has a majority in the National Assembly. “To get more a rational economic framework and avoid default, you require the opposition to be in charge — and right now Maduro is pushing back.”

Adding to the unrest and sense of crisis, Venezuela’s biggest business grouping, Fedecámaras, issued a statement yesterday calling on lawmakers to reject Maduro’s decree in National Assembly. The groups said the crisis had began to take place in 2000 and was the direct result of Chavismo and the ruling Socialists.

The opposition’s Democratic Unity Roundtable (MUD) coalition has already indicated it will likely vote against the decree and has set up a committee to analyze the request.

Venezuelan Executive Vice-President Aristóbulo Istúriz said yesterday he hopes lawmakers will back the decree, saying it was time to overcome the “economic war.”

Herald with Reuters, AP