(Bloomberg) -- The chances are tiny. The payoff could be huge.
That’s the calculation a small number of investors in Venezuela’s debt are making as they size up the chance of an electoral upset for the ages -- a vote in May that would oust President Nicolas Maduro and replace him with a more market-friendly alternative.
The math goes like this: If Maduro wins, bondholders will be in the same place they are now -- stuck holding onto their defaulted notes with little hope they’ll get repaid anytime soon. But a victory by opposition candidate Henri Falcon could clear the way for a restructuring at prices significantly above current levels near 30 cents on the dollar. (The 56-year-old would need sign-off from Venezuela’s opposition-led National Assembly).
“The election has optionality,” said Jan Dehn, the London-based head of research at Ashmore Group Plc, which is overweight Venezuelan debt. “If Falcon wins, the game changes entirely.”
At least six investment firms are buying Venezuelan debt with an eye toward a post-election payoff, according to money managers who asked not to be identified for compliance reasons.
Bondholders and bond prices have mostly been mired in limbo since November. That’s when Maduro said international financial institutions were conspiring to hobble the economy, forcing the country to suspend debt payments and seek to restructure its obligations. But U.S. sanctions imposed for anti-democratic moves and human-rights violations mean Venezuela can’t issue new bonds that would generally be part of any restructuring. Thus, not much changes as long as Maduro remains in power and the sanctions stay in place.
To many analysts, Maduro’s re-election is as much of a lock as Vladimir Putin in Russia or Abdel Fattah el-Sisi in Egypt. They say chances of him going down at the ballot box are slim to none given his virtual stranglehold on the media, his jailing of the most popular opposition politicians and the lack of electoral observers in a vote that some regional leaders have already criticized as fraudulent.
Yet Falcon, who’s pledged to lead a creditor-friendly debt restructuring, has some crossover appeal as a former backer of late socialist leader Hugo Chavez and a recognizable face on Wall Street and in Washington. And Venezuelans appear desperate for change.
More than nine in 10 hold a negative view of their nation’s situation amid its worst-ever recession, a rapidly depreciating currency and annual inflation estimated at 6,147 percent. In a head-to-head matchup, 29 percent of Venezuelans said they’d pick Falcon versus 19 percent for Maduro, according to a March survey by Caracas pollster Datanalisis.
Still, current bond prices reflect a low probability of Falcon winning, according to Shamaila Khan, director of emerging markets at AllianceBernstein. Venezuela’s benchmark dollar bonds due in 2027 trade at 32 cents on the dollar, down from 50 cents a year ago.
While Dehn assigns just a 25 percent chance that Maduro will lose the election, he says that Venezuela’s rapid decline could accelerate his exit via a military coup or a popular uprising.
“Given the speed at which Maduro is sawing away at the branch upon which he sits, it cannot be long,” he said.
Other investors are spooked by the prospect of Maduro clinging to the presidency. In their nightmare scenario, he would not only win re-election but further consolidate power.
Knossos Asset Management, the Venezuelan-dedicated hedge fund known to make big bets on the nation’s debt, has diversified its portfolio to include Ecuador, Argentina and Turkey with just 10 percent invested in Venezuela, according to co-founder Francisco Ghersi.
Even if Falcon wins, there’s no guarantee the Trump administration would lift its current restrictions on a restructuring. But Treasury Department officials have said privately that those restrictions were drafted with the intent of forcing out Maduro, alluding to the ban likely being lifted once that occurred, according to two people with knowledge of the matter.
That’s leading some bondholders to feel increasingly optimistic that maybe, just maybe, months of being stuck with little recourse as $2 billion in debt payments went overdue will all be worth it.
"The upside is larger than the downside," said Victor Fu, the New York-based director of emerging-market sovereign strategy at Stifel Nicolas & Co. "But the downside is not just losing a little money. The downside could be that bonds move back to their previous lows."
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