Analysis: Venezuela Promises A ‘Restructuring’

Following the default of its state electricity provider and ahead of its upcoming creditor meeting, Venezuela has begun a necessarily long and complex debt restructuring process. As the country shows more signs of unraveling, we examine what investors must keep an eye on as Maduro’s government attempts to contain its situation.

Maturity structure of Venezuelan bonds.

According to Rachel Ziemba, managing director of emerging market research with 4CAST-RGE, bond markets already price in a very low recovery value. “Poor international coordination, divergent creditor interests and sanctions suggest it could be even lower,” she explains. “A default has long been in the cards, and this one was likely triggered by weakened oil output (the recent price rally notwithstanding), diminished domestic opposition and Russia’s demand that other creditors share losses. Restructuring is probably Venezuela’s best option, but how it is done matters.”

What To Watch

Venezuela Debt And Economic Plans:

Venezuelan ocials have yet to publicize any views on long-term debt and economic sustainability. “We do not expect major domestic policy changes, especially without International Monetary Fund involvement,” says Ziemba. involvement. This increases the risk of unilateral selective defaults to buy time.

Diverging Creditor Interests

Russia is focused on its commercial interests and may want equity stakes, while other creditors may push for full repayment despite having bought bonds at pennies on the dollar. The volume of maturities (Figure 1) suggests a maturity extension will not be enough, meaning face value reductions will be needed. Valuing Venezuela’s oil reserves to estimate present value is likely to cause another tense debate.

US Sanctions:

U.S. sanctions: Sanctions make the restructuring more complicated but are unlikely to stand in the way of a real solution. Recent sanction adjustments aimed to avoid directly blocking any restructuring, but U.S. and Venezuelan goals remain at odds.

Photo Credit: Ariana Cubillios in Caracas/Associated Press, graphic: Bloomberg, Roubini Global Economics.

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