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Venezuela to Make a Bond Payment but Long-Term Doubts Persist

Many think struggling country still looks vulnerable to default by year’s end

Venezuelan President Nicolas Maduro
Venezuelan President Nicolas Maduro Photo: Reuters

Venezuelan officials said late Thursday they will make a $2.1 billion bond payment due next week, fending off fears of default for the moment.

Nevertheless, many investors think the country still looks vulnerable to default by year’s end, an outcome that could inflict more pain on the country’s struggling people.

Venezuela’s government and its state-owned energy company owe approximately $8 billion in debt still due this year. Next year, another $7.9 billion of debt comes due. With the country’s foreign reserves dwindling to about $10 billion and its options for raising cash narrowing, investors are becoming more skeptical that Venezuela will be able to service its debt much longer.

The country has a 41% probability of a default or missed payment in the next six months, according to the credit default swap market. That’s up from a 34% chance only a month ago, even though oil prices have been relatively steady.

The bonds that have a payment due on Wednesday were issued by Petróleos de Venezuela SA, the state oil-and-gas company known as PdVSA that has suffered a cash crunch since oil prices began plunging in 2014. Venezuela has bountiful oil reserves, but under-investment has led to a sharp decline in output.

The country has spiraled into a crippling economic crisis marked by a shortage of basic goods, rising crime and soaring inflation.

Despite this, President Nicolás Maduro has prioritized debt payments to PdVSA’s mostly foreign bondholders. Government officials fear that a default could cause the country to lose control of the oil giant, which provides nearly all of the foreign currency used by Venezuela to import everything from milk and medical supplies to machinery parts.

“The dollars aren’t enough to pay for food and debt service,” said Alejo Czerwonko, an emerging markets investor at UBS Wealth Management. “So you need to find dollars under the couch and mattress to make ends meet.”

Venezuela has raised some money by taking measures that have been hard on the population. The government last year severely restricted imports, halted basic infrastructure maintenance and abandoned certain food and service subsidies.

The country is also relying on China for oil-backed loans. Venezuela abandoned its relationship with the International Monetary Fund about 10 years ago, after the government said it was uncomfortable with conditions that the IMF required for a loan program.

When that wasn’t enough late last year to convince bondholders to extend the debt, PdVSA mortgaged its U.S. subsidiary, Citgo Holding, which has three refineries, pipelines and gasoline stations throughout the U.S. The state oil giant pledged just over half the equity in Citgo to bondholders and then pledged the remaining to secure a loan from Russian oil producer Rosneft.

New efforts by Mr. Maduro’s administration to sell oil to China and Russia were blocked by Venezuela’s opposition-controlled National Assembly. The Supreme Court, which has been supportive of the president, ruled that the president no longer needs congressional approval to create joint oil ventures. The political infighting further spooked investors.

Analysts say the country looks hard-pressed to find other sources of cash. Siobhan Morden, a fixed-income strategist at Nomura, estimated that Venezuela has about $7.2 billion in gold reserves it could sell to make bond payments.

“They have different ways to come up with the money,” said Diego Ferro, co-chief investment officer at Greylock Capital Management.

Mr. Ferro paid less than 40 cents on the dollar for some of the bonds that mature next week. The bonds traded recently at 96.5 cents on the dollar, reflecting that the market expects full payment.

A firm that bought the bonds in February at their lows of 36 cents on the dollar would have a return of 113.7% on principal if held to maturity, according to Nomura.

Investors, however, say they are less confident about the country’s ability to pay in the fourth quarter, when bulk of payments are due. The country has already dropped non-oil imports 43% year-over-year, according to Nomura, with another 18% drop expected this year and increasing social unrest.

“I think they will pay next week,” said Casey Reckman, director of emerging markets economics at Credit Suisse . “I’ve gotten less comfortable and have less conviction about how long this will go on.”

Corrections & Amplifications
An earlier photo accompanying this article incorrectly said it showed President Nicolás Maduro before a speech in Caracas. It was not Mr. Maduro. (April 7)

Write to Julie Wernau at [email protected]

Appeared in the April 8, 2017, print edition as 'Venezuela to Make A Bond Payment.'

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