It has been called the Schrödinger’s cat of the debt world — the country that simultaneously both is and is not in default.
This month, Venezuela announced it would restructure all its foreign debts. Soon after, it began missing deadlines for bond payments and was declared to be in default by rating agencies and others.
Nevertheless — apparently — it continues to make payments on its bonds.
As if the complexity of Venezuelan debt was not already on a par with quantum mechanics, investors appear to have identified another paradox, as gaps have opened between the prices of almost identical bonds.
By any ordinary definition, Venezuela is already a serial defaulter. It has defaulted on miners, oil companies and other enterprises whose assets it has seized without compensation. It has defaulted on unpaid suppliers to PDVSA, the national oil company. Most seriously, it has defaulted on its people, denying them access to basic foods and medicines, causing an epidemic of weight loss and turning injury or illness into a mortal danger.
Until this month, however, it had not defaulted on its bondholders. But it has now — or maybe not.
“Nobody knows what the hell is going on,” says Russ Dallen of Caracas Capital, a boutique investment bank that closely follows Venezuelan bonds.
Prices of Venezuelan bonds have rebounded from their lows on November 3, the day after President Nicolás Maduro announced the restructuring.
But not all bonds have rebounded together. The first chart shows two pairs of bonds, with similar maturities and coupons, issued by the sovereign and by PDVSA.
Previously, the pairs traded at similar prices. Yet, while the sovereign and PDVSA bonds at first fell in lockstep, they have since moved apart. The PDVSA bonds are now priced about 6 cents on the dollar above their sovereign counterparts.
“People think they are more likely to default on the sovereign,” says Mr Dallen. That makes sense, he says, because sovereign immunity laws make asset seizures unlikely in the event of default.
“The idea is that they would protect PDVSA because it’s the money generator,” he adds, “and they can keep paying because it doesn’t have large maturities over the next two years.”
As the second chart shows, PDVSA has just come through a period of heavy payments. Next year, it is the sovereign that will struggle, with more than $5bn in interest and amortisation coming due, compared with less than $3bn at PDVSA, which has several months with no payments at all.
One factor in investors’ calculations changed abruptly on Friday, when it emerged that Crystallex, a Canadian gold miner seeking compensation for the seizure of its Venezuelan assets, had reached an undisclosed settlement that may be the biggest agreed to by Caracas.
If confirmed, the settlement will end attempts by Crystallex to seize assets owned by PDVSA. This may reinforce the notion of sovereign immunity and of a preference in Caracas to give up first on its sovereign bondholders.
Yet even if investors expect PDVSA to survive longer, both issuers are now priced for imminent default.
“If you’d asked me a month ago I’d have said it was a matter of months or years,” says Siobhan Morden, head of Latin American fixed income strategy at Nomura. “Now it’s weeks to months. But people have not given up hope of receiving payments. If they had, we’d be at price lows.”
Indeed, even after saying it cannot pay, Caracas appears willing to try, perhaps on the conviction that outright default would plunge the country into chaos and bring the government down. Its options are limited by US sanctions, which would severely complicate any restructuring.
Nevertheless, Caracas made a payment on a bond issued by Elecar, an electric utility, when late payment had already put the bond into default and when continued non-payment would not have constituted a credit event for other bonds. On Friday, PDVSA’s Twitter feed issued several statements saying payments were on their way.
Holders of defaulted PDVSA and sovereign bonds appear not to have received those payments. However, Clearstream, which handles bond payments, told holders last week it had received payments “apparently in discharge of the issuer’s interest payment obligation” due October 13 on a PDVSA bond maturing in 2027 but that, because it had been paid “in an irregular form and manner”, it would withhold the funds until it had completed inquiries, probably by the middle of this week.
Investors have been left to second-guess the government in Caracas.
It may be driven by domestic politics, says Robert Koenigsberger, head of Gramercy, a hedge fund. “Maduro could be using this opportunity to set the stage domestically for a future default. Or, the government could be naively expecting bondholders to lobby for sanctions relief in order to be able to renegotiate the debt.”
Ms Morden thinks Caracas is no longer making calculations of any sort but merely muddling through an endgame with whatever resources it can find.
She says favouring bondholders over citizens may no longer be a valid survival tactic. She notes that Venezuela’s currency has gone into freefall on the parallel market and inflation has shot to the sky. She expects imports, critically low at $10bn this year, to fall to $5bn next year.
“I used to think the catalyst for regime change would be default,” she says. “Now we can’t rule out a domestic shock.”
Schrödinger’s or otherwise, Caracas may have no more cats to pull out of the bag.
Additional reporting by Robin Wigglesworth