How to Trade Venezuela? Investors Struggle With the Moving Parts

(Bloomberg) -- As the screws tighten on Nicolas Maduro’s authoritarian government, investors have plenty to juggle as they build a strategy for the nation’s assets. With the situation so fluid, few are prepared to commit to a position. The impact of sanctions and an ascendant opposition must be weighed against the influence of Venezuela’s powerful creditors and the leanings of the country’s military.

Venezuela’s sovereign dollar bonds due in 2022 dropped 0.36 cent to 33.35 cents on the dollar at 11:39 a.m. in New York, halting a two-day rally.

Richard Segal, a senior analyst at Manulife Asset Management in London:

  • The “regime-change trade” in Venezuela’s bonds will ultimately depend on decisions by the military and large bilateral creditors such as China and Russia
  • “I’m waiting for the FAQ about this decree to be published, but in the past sovereign and PDVSA bonds issued before August 2017 have been exempted from sanctions”
    • “In the meantime, I expect the status quo to continue”
  • “There have been sanctions against Venezuela and PDVSA for about four years, and this is another step”

Jason DeVito, money manager at Federated Investment Mgmt Co. in Pittsburgh:

  • “We are positive on the developments in Venezuela and the outlook for bonds. I think that a lot of Maduro’s power stems from being able to provide remuneration and other incentives to the rank and file of the military. Ultimately, PDVSA has been a big ATM and enables Maduro to maintain his power network”
  • At the same time “the sanctions are going to strengthen the position of the opposition and make the likelihood of a power transition higher”
  • On PDVSA bonds: “As of now we can’t trade them, but we’re waiting for more clarification. It does not appear to be there is any quotation in PDVSA bonds in the U.S. at the moment”
  • On the possibility of the opposition seizing Citgo: “Anything that is not in the hands of Maduro would be good for bondholders. Citgo bonds have a structure that allows the bondholders to be in first priority position, and I don’t think that will necessarily change if the opposition takes over. I don’t think that the opposition will do anything to disrupt support from the U.S. and the international community. I think if they take over Citgo, borrowers will continue to get paid”

Graham Stock, senior sovereign strategist for emerging markets at BlueBay Asset Management in London:

  • “Oil that was previously sold to the U.S. will have to be sold at a discount elsewhere, and on the other side of the coin, PDVSA will have to pay more for some of their imports like fuel”
  • Sanctions make life for Maduro more difficult because it leaves fewer resources to spend to ensure the support of various parties in his administration, but he will still have access to the proceeds from the oil that he sold elsewhere, Stock says
  • Sanctions also potentially complicate the trading of debt because U.S. banks are the most frequent intermediaries for PDVSA debt. “If a U.S. bank can’t buy the bonds, then no one can sell. But we need clarification on that from the U.S. Treasury”

Bryan Carter, head of emerging-market debt in London at BNP Paribas Asset Management, which oversees the equivalent of $470 billion:

  • “The reason why PDVSA bonds were trading at a higher recovery value than the sovereign was based on the expected future oil earnings and the belief that the assets of the company would ultimately yield a higher recovery value from whatever debt restructuring exercise seems inevitable”
  • “Now cash flows are impaired by the oil sanctions and we don’t know the economic future of the company. It is no longer clear there should be a premium for PDVSA bonds over Venezuela bonds”
  • On PDVSA debt trading: “It is regrettably unclear. We know that in the revised General License issued by OFAC there are now no PDVSA bonds listed, which means U.S. persons are not allowed to transact in the securities and most third parties have reached the same conclusion. That is the only thing we know”
  • “We have been underweight on Venezuelan bonds for a long time”
  • “Until we see more positive resolution along the social dimension that the proceeds raised on behalf of the citizens of Venezuela are actually used for the benefit of the citizens of Venezuela, we don’t have an interest in buying more debt”

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