NEW YORK/LONDON (Reuters) – As Venezuela heads for pivotal elections at the weekend, its bondholders are on a recruitment drive in the hope the vote will open up some sort of path to the world’s biggest debt restructuring.
Estimates of how much Venezuela owes vary from $60 billion to $150 billion depending on whether its loans-for-oil deals are included but JPMorgan has described Sunday’s election as bringing “the highest political uncertainty in recent memory”.
The opposition alliance’s candidate for the presidency, Edmundo Gonzalez, has attracted significant support, but President Nicolas Maduro – whose 2018 reelection is considered fraudulent by the United States, among others – is sounding confident he can win a third term.
While opposition figures and analysts are warning the vote may not be fair, Maduro has rejected such suggestions, saying the country has the world’s most transparent electoral system.
Venezuela had suffered six-digit hyperinflation for about four years, with the indicator reaching a heady 130,000%, eroding savings and making basic supplies scarce. But annual inflation fell to around 50% over the last year as the government restricted credit, held the exchange rate steady and curbed public spending.
Despite all the uncertainty and risks that come with it, Venezuela bond prices, which remain the best gauge of investor sentiment despite being in default since 2017, are more than double where they were a year ago.
It is largely thanks to the U.S. lifting a trading ban in October. Buying newly issued Venezuelan debt is still prohibited – something that would need to change for a restructuring to happen – although there has been some maneuvering into position.
Maduro’s government has hired Rothschild to map out its creditors while the main bondholder group – the Venezuela Creditor Committee – which already includes heavyweight funds like Fidelity, GMO and T. Rowe Price is on a recruitment drive.
It recently switched legal advisors and expanded its core “steering group” to 10 member. It is also working on an additional “ad-hoc” group to further enhance its clout for if and when the time comes.
ELECTION AFTERMATH
Given how tangled the process is likely to be, bondholders would like for the sovereign debt and PDVSA debt to be treated together, although whether that can happen remains an open question, and there are the elections to navigate first.
JPMorgan points out that Venezuela’s debt is still trading at a 75-80% discount to its face value and PDVSA bonds at a more than an 80% discount, which suggests investors don’t expect the election result to be viewed as fair.
In the scenario though where the vote is judged to have been broadly legitimate, or there is a surprise opposition victory, a possible restructuring route could open up.
Citi’s analysts are upbeat. They think the most likely scenario is a Maduro win with international recognition and see a restructuring happening “in the near term”.
Investors meanwhile are trying to keep an open mind.
“With Maduro negotiating, he may be nicer to bondholders in the sense that he probably won’t care about debt sustainability or about the orthodox way of a sovereign restructuring,” said Carlos de Sousa, an emerging market debt manager at Vontobel.
“But if you have the opposition… they’ll probably get the IMF involved, they’ll probably wait until there is actual economic data with which you can estimate a debt sustainability analysis, and they will probably push for a bigger haircut (writedown of the debt).”
Others though note the U.S. election will be just as crucial and are watching how traditionally hawkish Republican nominee Donald Trump and his Democratic rival for the White House Kamala Harris react to Venezuela’s result and especially if they send any signals on the key sanctions.
“That is the big question going forward,” Joe Delvaux, a debt restructuring specialist at Amundi, said referring to the bond buying ban.
“Typically, any new administration coming in will not immediately take any sanctions off.” he said. “So we will have to see how the elections go in Venezuela… and see how things evolve from there.”
(Reporting by Rodrigo Campos and Marc Jones; Editing by Frances Kerry)
