The scores of money managers and analysts who crowded into Cleary Gottlieb Steen & Hamilton LLP’s panel discussion on Venezuela last week are a testament to the deepening concern over whether President Nicolas Maduro can make good on the nation’s debt obligations.
During the two-hour event on the 39th floor of the law firm’s downtown Manhattan office, some 150 attendees pressed the lawyers on an array of potential scenarios if Venezuela defaulted, according to interviews with six attendees who asked not to be identified because the meeting was private. Among the topics debated were whether the state oil company’s U.S. gasoline stations could be seized as collateral and whether it was legally possible for Venezuela to restructure the producer as an empty shell to avoid bondholder claims, they said.
For a country that hasn’t missed a foreign bond payment in decades, the questions reflect growing speculation the socialist revolution that transformed Venezuela over the past 15 years under Hugo Chavez and now Maduro has finally pushed the nation to the brink of economic collapse. After this year’s plummet in oil, which accounts for almost all of Venezuela’s exports, investors are now clamoring for insights from the law firm that represented Argentina in two defaults on how the government might defend itself when the money runs out.
Nationalized Companies
“Venezuela has always proven they’d move heaven and earth to pay their debt,” Arif Joshi, who helps oversee $14 billion at Lazard Asset Management, said in a telephone interview from New York. “They’ve waited so long to adjust their policies that it’s starting to fall out of their control.”
Joshi declined to say if he attended the meeting.
The South American country, which has nationalized more than 1,000 companies to fulfill Chavez’s socialist ambitions, imports three-quarters of its goods and suffers from the world’s highest inflation. That’s left the nation plagued by chronic shortages of everything from toilet paper to milk, and helped reduce the country’s foreign-currency reserves to the lowest levels in a decade.
Maduro said in a televised speech last night that credit-ratings companies had imposed a “financial blockade” on Venezuela to prevent it from borrowing abroad and that opposition politicians were to blame for the country’s economic woes.
“We have a financial blockade impeding us from getting financing we need to confront the fall in oil prices,” he said in Caracas. Venezuela has lower credit ratings “than countries at war or with Ebola. This has political causes.”
Credit Ratings
Moody’s Investors Service and Standard & Poor’s rate Venezuela seven levels below investment grade at Caa1 and CCC+. Moody’s rating is in line with Greece, Egypt and Pakistan.
The likelihood that Venezuela will repudiate its bond obligations over the next two years is 73 percent, based on trading in credit-default swaps and CMA data.
Speakers at the Cleary event included partners Lee Buchheit, who has represented countries from Iceland to Greece in debt negotiations, and Carmine Boccuzzi, an attorney for Argentina in its decade-long battles with creditors, according to a copy of the agenda. Benjamin Ramsey, an economist at JPMorgan Chase & Co., also appeared on a panel.
The room at 1 Liberty Plaza, in the heart of New York’s financial district, was so packed that some people were compelled to stand in the back, one attendee said. The audience included representatives from CarVal Investors, an investment firm with $10 billion of assets, and Owl Creek Asset Management, which oversees $4 billion, two of the people said.
Recovery Price
Ann Folkman, a spokeswoman for Hopkins, Minnesota-based CarVal, and Patrick Clifford, a spokesman for Owl Creek in New York, declined to comment on the meeting. Shannon Lynch, a spokeswoman for Cleary, also declined to comment.
“People are obviously asking themselves not just whether the government is going to pay, but if you end up in a restructuring scenario, what sort of recovery valuations you’re going to be getting,” Patrick Esteruelas, an analyst at hedge fund Emso Partners, which oversees about $2 billion in debt, said in a telephone interview from New York.
He declined to say if he attended the meeting.
Citgo Petroleum
The attorneys fielded questions on whether Venezuela would be more likely to default on sovereign bonds or those of Petroleos de Venezuela SA, according to the people. Because PDVSA relies on foreign investment and has more assets for creditors to seize, a default on the state oil company is less practical, they said. The country would be better off extending the maturities of its sovereign debt, they said.
If Venezuela defaulted, it would be difficult for investors to seize Citgo Petroleum Corp., PDVSA’s Houston-based refining business, because they would have to prove the company is an alter-ego of the government and pierce the corporate veil, they said.
Investors were also interested in the possibility Venezuela might transfer PDVSA’s oil-drilling concession and infrastructure to a different company, leaving PDVSA without any assets to pay its debt. The lawyers told their audience that the scenario was unlikely.
“The timing is unclear but if they had to restructure, they will do what is best, perhaps not so Machiavellian,” Cathy Hepworth, a Newark, New Jersey-based money manager at Prudential Financial Inc., said in an e-mail.
She said she didn’t attend the meeting.
Oil Prices
Venezuela’s average crude price fell to $61.92 a barrel in the week ended Dec. 5, the lowest since May 2010. As recently as June, the price was above $100 a barrel.
The country has about $138 billion in foreign-currency debt payments due from 2015 through 2038, according to a Nov. 19 report by Daniel Chodos, an analyst at Credit Suisse Group AG. Barring any increases in crude output or cuts in imported goods, Venezuela will need oil to average about $97 per barrel to meet obligations, he wrote.
The nation had about $21 billion in arrears to private companies as of October, according to Caracas-based research company Ecoanalitica.
“In the event that you get to a default as a result of a government that is managing cash flow but ultimately finds itself falling short, then frankly everything could be fair game,” said Emso’s Esteruelas.
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