Venezuela Bond Surge Shows Faith in World's Biggest Loser

(Bloomberg) -- Venezuelan debt is kicking off 2018 on a tear.

The nation’s bonds, which led global losses in 2017 after the government declared it needed to restructure its debt, have returned a world-leading 12 percent. That’s four times what investors got from second-place Tajikistan, according to data compiled by Bloomberg. 

Money managers chalk up the turnaround to improving odds that the Trump administration will loosen sanctions that stand in the way of a Venezuelan debt exchange, regardless of whether embattled President Nicolas Maduro remains in power, as well as higher prices for oil, the nation’s primary export. While pessimism abounds as the country suffers from one of the world’s deepest recessions, quadruple-digit inflation and $1.5 billion of overdue bond payments, a growing camp of optimists see reason for hope.

“I don’t understand why the market got so negative in the first place,” said Jan Dehn, who helps manage Ashmore’s $70 billion in emerging-market holdings from London. “It’s just the market getting a bit more realistic about valuations.”

If negotiations currently taking place between Venezuela’s rival political factions yield a fair presidential election this year, the U.S. government may relax restrictions imposed last year that prohibit a debt restructuring, according to Dehn. That would be positive for bondholders as the recovery value on the notes is higher than where most are trading, he said.

Venezuela’s benchmark dollar bonds due in 2027 rallied on Wednesday to a two-month high, defying a drop in crude oil.

Yong Zhu, a portfolio manager at DuPont Capital in Wilmington, Delaware, also recently listed Venezuela as one of nine undervalued emerging-market sovereigns, saying he expects a change in government over the medium term clearing the way for a debt restructuring.

Not everyone is convinced. The country’s notes still trade at less than 30 cents on the dollar and are far below where they were trading before Maduro announced the restructuring. Francisco Ghersi, managing director of the Venezuela-dedicated hedge fund Knossos Asset Management, said his firm has no Venezuelan bond exposure and assigns an 80 percent chance that the president remains in power by year’s end.

“The only way that Maduro can be out is if there are elections with a new electoral council, international observers and the commitment of the military,” he said.

But Siobhan Morden, the head of Latin America fixed-income strategy at Nomura, said speculation is increasing that Maduro can’t last much longer with the economy stuck in the doldrums. A new president -- whether part of the opposition coalition or a more moderate ally -- would almost certainly usher in a much-needed economic overhaul, she said. That could particularly favor notes from state-owned oil firm Petroleos de Venezuela as well as Venezuela’s $4 billion of debt due in 2027, according to Morden.

Torino Capital chief economist Francisco Rodriguez said there’s a “good likelihood” elections bring about a new president, most likely an opposition candidate, who incorporates some elements of the government’s socialist ideology while revamping economic policies.

“This in itself should generate a virtuous growth cycle, especially if improved access to financing of oil industry investments leads to a production recovery,” Rodriguez said in a note last week.

To contact the reporter on this story: Ben Bartenstein in Lima at bbartenstei3@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Daniel Cancel at dcancel@bloomberg.net, Brendan Walsh

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