Venezuela, PDVSA & Schrodinger’s Cats

If you are a little confused about Venezuela and PDVSA and when, whether and why they are in default, don’t feel bad.  That issue is confusing market makers and even the rating agency referees.


After Venezuela and PDVSA markets froze up yesterday over confusion about whether interest should be included in trades or not, this morning started with an EMTA meeting where the majority of participants agreed that bonds would trade with interest.  When bonds are in default, the market norm is that they trade flat – ie without interest.  This is the second time in 2 weeks that there was confusion over this issue.  Because yesterday some bonds were trading with interest and some without (depending on whether they were in the grace period or not), one of the biggest firms on Wall Street and Canary Wharf — with a trader who I regard as one of the best Venezuela traders out there — traded less than $100 million face (around $30 million in real money).


Then there is ISDA, the International Swaps and Derivatives Association, that is called upon to determine whether there has been a failure to pay event on both Venezuela and PDVSA.  They are stuck on the issue of exactly when Venezuela and PDVSA actually paid, because no one really knows that information — except Venezuela which keeps saying confusing and contradictory dates.  Hopefully ISDA will be able to cut through the BS of Venezuela’s smoke and mirrors game this week.
Finally, even the expert referees — Standard and Poor’s, in this case — are confused.  Last night S&P marked PDVSA into both Default and Selective Default, which are confusing classifications as well.  But here’s the thing: they based that decision on two bonds, when only one was actually in default.  According to S&P, “Venezuela-based oil and gas company PDVSA failed to make its interest payments on its 2027 and 2037 senior unsecured notes within the 30-calendar-day grace period, which expired on Nov. 13, 2017.”



The problem is that PDVSA actually — albeit weirdly — paid the $41 million on the PDVSA 2037 (which was originally due on October 12) in late October and clients started receiving the funds on October 26 and 27, so PDVSA did not toll their whole grace period on that bond.  Whoops.





So, don’t worry about being confused — Venezuela and PDVSA have become the Schrodinger’s cats of the debt world.

El Nuevo Herald: Inversionistas dispuestos a perdonar el default de Maduro, por ahora

Los expertos dijeron que eso podría ser una situación que se extienda por incluso meses siempre y cuando los tenedores de bonos continúen convencidos de que el régimen bolivariano va a pagar.

Bajo las cláusulas de la mayoría de bonos venezolanos, la decisión de ir a las cortes y disparar “la aceleración” de los pagos puede ser tomada por un 25% de los acreedores, explicó Russell Dallen, socio gerente de la firma Caracas Capital.

Pero por el momento, los tenedores de bonos parecen estar dispuestos a esperar a ver si el régimen de Caracas va a cumplir con su promesa de pagar, dijo.

WLRN PBS Radio: The ‘D’ Word Is Out – But Experts Say Venezuela Default Not Happening Yet

“When the ratings agencies say you’re in default, that’s a bad thing,” says Russ Dallen, who heads the Miami investment firm Caracas Capital Markets. “But ultimately it’s the bondholders who it has to matter to. And if Venezuela is telling them we’re going to pay you – and you believe them – then you’re going to sit on your hands and wait.”

Dallen says if Venezuela’s bondholders decide the regime can’t pay up anymore, they’ll start seizing the country’s only real asset: oil.

“Everything gets more aggressive at that point,” he says. “They’re going to start trying to seize ships on the high seas and oil shipments and payments, because their job is to collect their debt.”

Financial Times: Russia and Venezuela agree $3bn debt restructuring

Russ Dallen of Caracas Capital, a boutique investment bank that follows Venezuela, said there were signals that the government was shifting its stance on the possibility of defaults. Previously, it has insisted that all payments would be made. But at a press conference on Tuesday, Jorge Rodríguez, the new information minister, said Venezuela would continue to meet its debt obligations “but not by mistreating our people as in times past.”

“They are planting the first seed,” Mr Dallen said.

Although PDVSA was excluded from the agreement with Russia, its bonds have been trading at higher prices than similar bonds issued by the sovereign. PDVSA faces a much lighter repayment schedule this year and next, and is a vital source of earnings for Caracas.

“PDVSA is the moneymaker so Caracas will want to keep it safe,” Mr Dallen said