Venezuela in 'selective default': ratings agency

Elias Hubbard
November 14, 2017

Over the weekend, the grace period on $280 million in bond payments expired, and late Monday Fitch Ratings declared PDVSA in default and S&P did the same to the sovereign after each were late getting cash to bondholders.

The newly created debt renegotiation committee will meet with creditors at 2 p.m. (1800 GMT) at the government's "White Palace" opposite the presidential building, Finance Minister Simon Zerpa said on Saturday.

Both Venezuela and Petróleos de Venezuela have fallen behind on several interest payments in recent weeks, taking advantage of a 30-day grace period.

"While our models have been pointing to Venezuela default as inevitable, it is incredibly sad to finally arrive at this devastating point", said Russ Dallen, managing partner at investment bank Caracas Capital Markets, which trades Venezuelan bonds.

It has less than $10 billion left in hard currency reserves, and yet it must make $1.4 billion in debt payments before the end of the year, and another $8 billion next year. Bonds issued by Venezuela and state oil company PDVSA rallied on Friday as efforts to keep current on obligations fueled optimism ahead of the meeting. USA sanctions now prohibit the type of bond swaps that would usually be part of any debt relief, and investors have shown a reluctance to engage with a government that's become an worldwide pariah amid allegations of anti-democratic activities.

About 70 percent of Venezuelan bondholders are North American, according to government figures. S&P said it can still reverse the downgrade if Venezuela makes the late payments before creditors organize and demand repayment, some analysts said.

"In addition, in our opinion, United States sanctions on Venezuela and government members will most likely result in a long and hard negotiation with bondholders", it said. US -based creditors are not prohibited from attending the meeting, but are barred from dealings with officials such as Zerpa and El Aissami.

Restrictions include a prohibition on U.S. entities buying any new Venezuela debt issues - usually a required step in any restructuring. It has also put El Aissami on a list of alleged drug-traffickers.

On Tuesday, the International Swaps & Derivatives Association will reconvene to consider whether PDVSA's delayed debt payments will trigger default-insurance contracts.

The actions from the ratings companies came after an odd spectacle in Caracas, where bond investors who made the trek to hear the country's restructuring proposal found a red-carpet welcome, an honor guard salute and gift bags stuffed with state-produced chocolate and coffee.

The so-called Determinations Committee for the Americas, comprised of 15 financial firms, met in NY following an initial gathering last Friday, "to discuss whether a Failure to Pay Credit Event had occurred" with respect to PDVSA, according to the ISDA. The weapons ban would stop sales of military equipment that could be used for repression or surveillance of Venezuelans. "People have bet on Venezuela declaring default - never", Maduro said during his weekly Sunday broadcast.

But his options are very limited. Worldwide powers accuse Maduro of stifling democracy by marginalising the opposition and gagging independent media.

In a speech before the UN Security Council on Monday, U.S. envoy Nikki Haley said Venezuela is "increasingly a violent narco-state that threatens the region, the hemisphere and the world".

Other reports by Click Lancashire

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