Venezuelan bonds may rally from dirt-cheap levels, but that hinges on the US government lifting trade sanctions. For distressed debt traders, that may happen sooner than later.
Venezuela is the biggest asymmetrical bet in sovereign debt markets.
Since Nicolás Maduro assumed the presidency in 2013, Venezuela’s economy has shrunk 75%, the largest recorded drop in a country not at war. Six million Venezuelans have left the country, cutting the population to 26.5 million.
But some European investment funds are betting that the easing of international trade sanctions and a resurrection of the country’s once-great hydrocarbons industry could usher in a restructuring of Venezuela’s external debt, estimated at between $120 billion and $150 billion. This could provide major returns on current bond prices. The geopolitical tides appear to favor this thesis, but political impasses in Washington need to be overcome first.
The last time Venezuelan bonds rallied was in January 2019. Traders were hopeful back then that Juan Guaidó, the US-backed president of the national assembly, could topple the Maduro government. But Guaidó’s revolution fizzled and the “maximum pressure” strategy of then US President Donald Trump subsequently tightened sanctions on the oil industry and banned US investors from purchasing Venezuelan debt. By early 2022, the price of Venezuela’s 2028 international bond had fallen to 6 cents on the dollar, while bonds of PDVSA, the state oil firm, sunk to 2 cents in September that year.
This time around, it’s not regime change but the geopolitical impact of Russia’s invasion of Ukraine on energy security that’s giving distressed debt traders cause for optimism.
In November 2022, the Joe Biden administration announced that it would allow California-based Chevron to resume oil exports from Venezuela. The loss of Russian supplies and the increasingly antagonistic stance of the Organisation of the Petroleum Exporting Countries toward the United States has heightened the need to secure new sources of oil and natural gas.
What’s more, the European Union stopped recognizing Guaidó as Venezuela’s interim president in January 2021, and the election of a succession of left-wing governments in Latin America has brought Maduro, once an international pariah, in from the diplomatic cold. Over the last six months, Maduro has held backslapping meetings with Colombian President Gustavo Petro and Brazil’s Luiz Inácio Lula de Silva. He has even shared warm words with French President Emmanuel Macron. An April conference in Bogotá focused on the Venezuelan situation resulted in a joint statement from regional leaders saying there was a consensus to lift sanctions in the event of progress over the country’s political future.
“At the moment we’re seeing small steps from both sides,” says Lee Robinson, CEO of Altana Wealth, a London-based investment firm. “No one has made the big step of removing sanctions, but it’s getting closer and that would lead to the biggest debt restructuring of the century.”
Photo: Lee Robinson
Economic Potential
Venezuela’s macroeconomic fundamentals look strong compared with other countries in default. In Argentina, entrenched popular ill-will toward bailout conditions imposed by the International Monetary Fund (IMF) have hampered debt negotiations for decades. In crisis-stricken Lebanon, the government has racked up debt equivalent to 150% of national output with few viable economic options for repayment.
Venezuela’s natural resources endowment, which includes gold, iron ore and other commodities in addition to oil, means that the country has a clear path to solvency. Since Chevron resumed its exports from Venezuela, its oil production there has grown rapidly to 100,000 barrels per day. That figure is expected to double by 2025, by which time the oil major will have recovered the $3 billion owed to it by Caracas. In a sanctions-free environment, that performance could be replicated across the industry, according to Robinson.
“Ten years ago, a decade into the government of Hugo Chávez, PDVSA was generating $100 billion in revenue and had a debt-to-GDP ratio lower than Germany,” says Robinson. “If the sanctions are lifted, the IMF comes in along with new US and European money, Venezuela could return to being a $500 billion economy in the next 10 years. There may be a haircut, but the country will be comfortably able to pay off its debt.”
Venezuela’s government wants to return to the international capital markets. In March 2023, it proposed a tolling agreement that would suspend the statute of limitations on external debt repayments, a sign that it wants to avoid litigation that could complicate future debt restructuring.
Big Hurdles
But while the geopolitical tide appears to be moving toward a reconciliation with Venezuela, numerous obstacles remain.
The first is that the US government still officially recognizes Venezuela’s 2015 National Assembly, rather than Maduro, as their interlocutors. Coming from Caracas, the tolling agreement has, so far, fallen on deaf ears in Washington, DC. Venezuela’s famously disorganized and disparate opposition, which is currently engaged in primaries for 2024 presidential elections, has shown little appetite to form a unified policy on the matter.
Another hurdle is that the 2017 bonds’ statute is due to expire in October 2023. Without a tolling agreement in place, this could force bondholders into a first wave of litigation that neither they nor Caracas want.
“Venezuela’s economic recovery will be much more difficult with $120 billion worth of judgments hanging over it than without,” says Hans Humes, CEO of Greylock Capital Management in Stamford, Connecticut. “DC really needs to rationalize its approach to this.”
Humes is also co-chair of the Venezuelan Creditors Committee, which has a combined holding of over $10 billion in Venezuelan debt. Major US institutional investors, including BlackRock, Fidelity Investments and PIMCO, remain the largest holders. But Humes estimates that their share has fallen from over half to around 35%.
A number of established European firms, including Altana, have taken on the debt, often at prices under 20 cents on the dollar. But the trading ban on US groups has opened the door to more opaque players, and that could complicate future debt restructuring talks, according to a veteran sovereign debt trader.
“The good investors are transparent, they deal with the IMF, the Paris Club and the US Treasury,” the trader says. “But the trading ban has led to an influx of buyers from unfriendly jurisdictions whose interests may not be aligned. The US has essentially lost influence and leverage on the debt negotiations.”
And then there’s the thorny question of Venezuela’s elections, scheduled for 2024. The Biden administration’s position remains consistent with that of Trump: sanctions will not be lifted until free and fair elections take place. The long-view investors are betting that this stance will be softened, with some level of political reform providing the excuse to drop sanctions without losing face.
Others believe they could be in for a long wait, however. It looks unlikely that Maduro is prepared to agree to anything that might cost him victory in 2024, according to José Ignacio Hernández, formerly a special prosecutor for Guaidó’s team.
The debt issue has shifted from deception to hope.
José Ignacio Hernández, former Venezuelan prosecutor
“The debt issue has shifted from deception to hope, but I do not foresee major changes from the Biden administration regarding sanctions,” he says. “Maduro is not showing any sign of accepting electoral conditions, and Biden is already paying a high political cost within the Democratic party for the flexibilization of sanctions regarding Chevron.”
In May, Democrat Senator Bob Menendez criticized any move to loosen sanctions on the “brutal dictatorships” of Cuba, Nicaragua and Venezuela, a stance popular with many US Latino voters.
For Venezuelan bond bulls, there are two scenarios with different timelines at play. One is fast: Caracas, understanding that electoral reform is its trump card, makes sufficient electoral guarantees in the coming year in return for an easing of the sanctions.
The second, and perhaps more likely, is slow: The participation of the opposition in the 2024 elections and the inauguration of a new president – perhaps even Delcy Rodríguez, the current vice president, if Maduro decides not to run – could lead to a reset in US-Venezuelan relations and the reopening of ties with Caracas that would allow debt talks to begin.
By then, however, Donald Trump, the man who originally introduced the sanctions – to the approval of Florida voters – could be back in the White House. Would he double down or would he, like the debt traders, smell a deal?
“I’ve been involved in emerging markets debt restructuring for 30 years and this is certainly one of the most complex cases I’ve seen,” says the veteran debt trader. “It’s got domestic politics, geopolitics, energy strategy, legal issues. It’s got everything.” LF