The time has come: Venezuela may be in default in under 48 hours

The time has come: Venezuela may be in default in under 48 hours

Venezuela’s state oil firm PDVSA faces a do-or-die debt repayment deadline on Friday and while most analysts expect it to come up with the money, the country is still laboring under a severe cash crunch that threatens to push it into default. This past weekend, Venezuela failed to make US$ 237 million in bond coupon payment, blaming "technical glitches" when it simply did not have the money (or wish to part with it). Adding the US$ 349 million in unpaid bond interest accumulated over the past month as of last Friday, that brings Caracas' unpaid bills to US$ 586 million this month, just days before the nation must make a critical principal payment. But some of the late payments have started to come through, and ECOANALÍTICA, a respected Venezuelan think-tank, on Tuesday tweeted that the government had set aside money for Friday’s repayment, calming investors again. Still, until Venezuela makes the two major payments, experts remain concerned. "I don't see how any person who's involved in Venezuelan debt can be anything except concerned, except for those who have credit default swaps," Russ Dallen, the managing partner at Caracas Capital Markets, told CNBC. "This weekend, there's either going to be a lot of bond holders and traders drinking champagne, or there's going to be a lot of stressed fund managers," he added. And, as Bank of America sovereign debt analyst Jane Brauer writes, while the bank's base case assumption is that Venezuela will make its debt service payments this year, "the probability of a short term default has increased substantially with coupon delays" and it could come as soon as this Friday, when an US$ 842 million PDVSA principal four-year bond maturing in 2020 plus interest payment is due, and which unlike typical bond payments does not have a 30 day grace period but instead is followed by a second US$ 1.1 billion PDVSA coupon on Nov 2, also without a 30 day grace period. As we keep track of missed payments, the 5 missed payments, so far totaling US$ 350 million all have a 30-day grace period, as did the US$ 237 million payments over the weekend. The concern is that the principal payments coming up have: No grace period in the bond indenture for an event of default. Three business day grace period before triggering CDS. The concerning principal due dates are coming up, the first of which is this coming Friday, which means in less than 48 hours Venezuela could be in default unless it can find US$ 842 million. Even if PDVSA makes it through the week, it is not out of the woods. It must make another, even bigger capital repayment of US$ 1.12 billion on November 2, and again there is no grace period. While bondholders might not want a default, holders of credit-default swaps would likely request that the International Swaps and Derivates Association declare a default so that they can receive payments on their contracts, Bloomberg reported. The price of that bond also rose on Wednesday, but it still changed hands at 95 cents on the dollar, highlighting fears that a default could still happen. The company and the state also face a plethora of smaller interest repayments over the next two months, meaning the total they must pay by the end of the year is around US$ 3.5 billion. The central bank says it has US$10 billion in foreign reserves although most of it is in gold. If Venezuela makes it through the next few months, things do not look any easier next year, when the government and state companies owe a further US$ 9 billion. The Venezuelans continue to look to Russia for help. The two countries expect to reach an agreement on restructuring Venezuela’s debt to Russia before the end of the year, although they have not said whether this will entail new loans. If there is a default, it is not obvious that investors would push Venezuela into restructuring talks. They may prefer to give them more time rather than entering lengthy negotiations that could result in them having to take severe haircuts on the value of the holdings.  Economists say a Venezuelan default would be much more complicated to sort out than Argentina’s in 2001. (Zero Hedge: http://www.zerohedge.com/news/2017-10-25/time-has-come-venezuela-may-be-default-under-48-hours; The Wall Street Journal: https://www.wsj.com/articles/pressure-builds-on-venezuela-with-big-payments-due-this-week-1509010203; Financial Times: https://www.ft.com/content/b1f9373e-b987-11e7-8c12-5661783e5589?mhq5j=e5; Fox News: http://www.foxnews.com/world/2017/10/25/venezuela-may-be-in-default-in-as-little-as-48-hours.html; Bloomberg, https://www.bloomberg.com/news/articles/2017-08-09/why-venezuela-struggles-so-hard-to-avoid-default-quicktake-q-a)