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Venezuela default confuses markets as restructure raises red flags

Venezuela default confuses markets as restructure raises red flags

Venezuela's default has created confusion among investors, but the main hurdles still lie ahead as the embattled nation attempts to restructure its debt while facing sanctions from the US.  

Monday night, Standard & Poor’s said Venezuela had defaulted on two issues, due in 2019 and 2024, after it failed to pay a total of $200 million in coupons within the grace period of 30 calendar days.

As a result, the agency also lowered the country’s long-term foreign currency sovereign credit to selective default (SD) from CC, a rating describing debt at risk of not being repaid.

The default itself wasn't a big deal for AllianceBernstein emerging market portfolio manager Shamaila Khan, given how distressed Venezuelan bonds already are.

‘I think really the key in Venezuela is not the rating. The key is, really, that they’re willing to pay and importantly their ability to pay going forward,’ said Khan, who runs the AB FCP I-Emerging Markets Debt Portfolio.

The country has come close to defaulting in the past but it's always met its obligations even if payments have come in late, Khan added.

Claudia Calich, the portfolio manager of the M&G Emerging Markets Bond Fund, had a similar take. She added, however, that the default had created confusion among investors.

‘A formal determination of default is still under review by International Swaps and Derivatives Association (ISDA), the ruling body that settles derivatives, which should be making an announcement shortly whether a credit event has occurred.

'Until that happens, there is confusion in the market on whether to quote the bonds with or without accrued interest.’ 

Blank slate?

S&P was the first agency to declare a default, but investors expect more such announcements as the country plans a restructure of its external debt without having access to new US capital. 

In August, the US banned dealings in new bond and equity issues by Venezuela's government by and state-owned oil company Petróleos de Venezuela (PDVSA).

The move sought to cut off funding for president Nicolás Maduro's government, which has been accused of human rights abuses and of eroding his country's democracy. 

‘[The sanctions have already] made it more difficult for Venezuela to get liquidity from the different sources they were tapping on over the course of the year,’ Khan said.

‘Clearly, production is dropping in PDVSA, so that is a concern on their ability to pay sort of more medium-term debt. Liquidity has probably been impaired as a result of the sanctions.’

In its statement Monday, S&P said it would likely consider the restructure a default given tight external liquidity, and since sanctions from the US would likely lead to difficult negotiations with bondholders.

However, Venezuela got a lifeline from Russia on Wednesday as the two countries signed an agreement to consolidate debt for more than $3.15 billion. 

The deal will allow Venezuela ‘to allocate funds for the development of the country's economy, improve the debtor's solvency and increase the possibility that all creditors will be repaid their loans,’ according to a statement from Russia's Finance Ministry. 

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