Venezuela’s political crisis spells opportunity for bond investors

Some government dollar bonds this week hit their highest levels since 2017 and state-run oil company Petroleos de Venezuela’s debt also rose after international support for opposition leader Juan Guaido spurred hopes that Maduro, a socialist, might be forced from office.

Guaido, who became the head of the National Assembly on Jan.

5, declared himself interim president on Wednesday, winning backing from the United States, Canada and Latin American right-leaning governments including neighbouring Brazil and Colombia.

Bonds in default, some of which recently traded near 20 cents on the dollar, have climbed closer to 30 cents but could still have plenty of room to rise, according to a note from strategists at Oxford Economics on Thursday.

“In the worst-case scenario, bond prices settle towards the low 20s by year-end if Maduro manages to forcefully cling to power,” the note read. In a change-of-regime scenario, however, “most investors and analysts, ourselves included, expect a recovery value of around 50 per cent.” However Maduro, in power since 2013 and sworn in for a second term earlier this month, has the key backing of the military despite the Opec member’s worsening economic crisis.

Defence Minister Vladimir Padrino said on Thursday Maduro is the “legitimate president” and the opposition was carrying out a coup.

“If you get to a stage where you can negotiate with a stable government to do a restructuring, prices are likely to be higher,” said New York-based Shamaila Khan, who manages portfolios holding Venezuelan bonds as director of emerging market debt at AllianceBernstein.

“However, there are many stages to go though before you get there,” she said. “First of all you have to see what the military is doing because that is going to be the biggest driver of regime change. The status quo (under Maduro) is serving them.” Khan said Washington’s sanctions strategy for Venezuela, which includes whether to impose an oil embargo, and how wide internal political protests spread, are among the main factors that will determine how the crisis is resolved.

But Guaido’s recognition as president by a large number of countries “could allow the international community to freeze and divert assets and revenues, including proceeds from oil exports, from Maduro’s administration towards Guaido’s, which could have an impact even bigger than an oil embargo,” Barclays research analyst Alejandro Arreaza said in a note on Thursday.

US national security adviser John Bolton said on Thursday the White House is focused on disconnecting Maduro from his sources of revenue.

Back to life

Venezuelan and PDVSA’s debt prices started to rebound from rock-bottom levels after Guaido took the helm of the Assembly and rallied further this week. The 2025 dollar bond dipped 0.37 cents on Thursday, having closed on Wednesday at 30.375 cents, the highest level since November 2017.

The PDVSA 2026 bond added 1.6 cent on Thursday to 29.36 cents before paring gains, for a paper gain of more than 50 per cent so far this year.

The European Union added its weight to the push against Maduro early on Thursday, saying Venezuela’s authorities should respect the “civil rights, freedom and safety” of Guaido, but stopped short of recognising him over Maduro.

Turkey and Russia have voiced their support for Maduro.

“For the first time there is a feeling that there is pressure coming from both outside and inside the country,” said David Nietlispach at Pala Asset Management, which holds both sovereign and PDVSA bonds.

“It is a massive step if the Americans do not recognise the government anymore ... On top of that, it looks like we have a candidate who seems to be able to unify the opposition.” Despite the surge in bonds over the last few weeks, few Venezuela-focused investors expect a resolution in the near future. The issue for them is how much of the bonds any new government would pay back.

There will be much bigger issues to tackle first, such as ensuring the population has enough food and medicine.

North Asset Management’s Peter Kisler, whose firm bought up more Venezuelan bonds around six months ago, said the best-case scenario was that things start to move on that front in a year or so. It could be a lot longer though, and investors may not get all of their money back.

“Our general thinking is 30-40 cents is going to be the eventual recovery. The issue is that we are now getting there in some assets, but it’s still not certain yet that (Maduro) is going to go.” Venezuela has the largest crude oil reserves in the world and is a major supplier to US refiners, but its economy has been brought to its knees by mismanagement and hyperinflation that hit 1.7 million per cent in 2018 and is forecast to rise to 10 million per cent in 2019.

Maduro’s government began gradually halting interest payments on some $50 billion in publicly traded debt in 2017 while the government and state-owned companies also owe more than $8 billion in unpaid interest and principal payments.