#Venezuela, the World’s Riskiest Sovereign #Debt

No nation in the world is more likely to miss payments,
according to traders of its credit-default swaps.  Venezuela is running out of money.

Venezuela’s Descent Into World’s Riskiest Sovereign Credit: Q&A

February 10, 2016 — 11:00 AM CET

The
price of oil, which makes up almost all of the country’s exports, has
tumbled 75 percent in the past three years and investors are predicting
the country is on course for the biggest-ever emerging-market sovereign
default. No nation in the world is more likely to miss payments,
according to traders of its credit-default swaps.

The country already tops measures of the world’s most miserable
economy, with inflation of almost 100 percent last year, a currency
that has collapsed on the black market to less than 1 percent of its
official value and shortages of basic goods such as detergent and
antibiotics. It’s a horrific turnaround for what was once one of the
region’s most stable democracies, famous for its big cars, cheap
gasoline and beauty queens.

While
bond prices suggest that most investors are confident the country will
make good on a $1.5 billion obligation coming due Feb. 26, the outlook
dims for $4.1 billion of notes the state oil company is due to pay back
in October and November.

Here are answers to some of the most frequently asked questions about Venezuela:

How much debt does Venezuela have?

Venezuela
has $35.6 billion of dollar bonds outstanding and owes $67 billion once
interest payments are included. State-owned oil company Petroleos de
Venezuela SA, known as PDVSA, has $33.5 billion of bonds, and $52.6
billion counting interest.

If there’s a default, when is it most likely to come?

Venezuela
has the cash to pay back the bonds coming due in February along with
$326 million of interest payments this month. In October and November of
this year, PDVSA needs to pay back $4.1 billion of bonds and $1 billion
in interest. The notes’ price of about 56 cents on the dollar indicate
skepticism the country will be able to do that.

Trading in the credit-default swaps market suggests there’s a 76 percent chance Venezuela will default in the next 12 months.

What might the recovery value of the bonds be?

Estimates
vary between 20 cents on the dollar and as much as 71 cents in the case
of PDVSA bonds. Since Venezuela is so reliant on oil, the value is
hugely dependent on the price of crude. Estimates compiled by Bloomberg
for the year-end price of West Texas Intermediate range between $38 and
$70 a barrel.

A second factor is the exchange rate
Venezuela uses. The country has three official currency rates, ranging
from 6.3 bolivars per dollar to 199.9 per dollar, not to mention the
black-market rate of more than 1,000 per dollar. A weaker currency would
lower the ratio of debt to the size of the economy, improve the
country’s trade balance, and reduce leverage for PDVSA. All that would
imply a higher recovery value.

Barclays Plc says that recovery values are likely to be higher on bonds from PDVSA.

What overseas assets could investors try to seize?

PDVSA
has refineries, tankers and receivables. Of course, the value of the
oil assets depends in part on the price of crude. In August last year,
Barclays estimated the total at between $8 billion and $10 billion, but
that was with oil fetching at least $50 a barrel.

The operating assets of Citgo Holding Inc., PDVSA’s U.S. refining subsidiary, are already pledged to creditors. The unit’s $1.5 billion bonds due in 2020 are secured by a 100 percent equity stake in Citgo Petroleum Corp.

How did things get this bad?

During his 14 years in office,
former President Hugo Chavez nationalized companies and expanded the
government’s role in the economy. By the time of his death in 2013,
domestic industry had been crippled, leaving Venezuela almost entirely
dependent on imports for consumer goods. Those imports were paid for
with revenue from oil.

The economic model, characterized by
government largess and inefficiency, was nonetheless more or less
sustainable with oil prices above $100, despite the occasional shortage
of toilet paper
and the fact that the government had pledged much of its crude output
to repay loans from China and in subsidies to regional allies such as
Cuba.

As oil prices fell, the government relied more on creating
new money to meet its expenses, helping fuel the fastest inflation in
the world and making the black-market bolivar the worst-performing
currency in the world.

By
mid-2014, with oil hovering between $90 and $100, Venezuela was in
trouble. President Nicolas Maduro, Chavez’s handpicked successor, could
have boosted the country’s income in bolivars by devaluing the official
exchange rate of 6.3 per dollar at which it sold much of its hard
currency. Yet he postponed the decision — possibly out of concern for
the inflationary impact such a move could have — in favor of a series
of reluctant half measures.

Now, with the country’s oil fetching
about $25 a barrel, Venezuela’s crude income will fall toward $22
billion this year, according to Bank of America Corp. That’s barely
enough to cover $10 billion of debt service on bonds, $4.3 billion of
imports for the oil sector and $6.2 billion of payments on loans from
China, the bank wrote in a note Feb. 8.

Unless Maduro slashes
government subsidies and devalues the currency, Venezuela won’t have
enough dollar income left to pay debt and import food.

Would a default be the biggest ever for a sovereign?

No, it
would be the second-biggest. Greece defaulted on $261 billion in March
2012, according to Moody’s Investors Service data. Argentina defaulted
on $95 billion in 2001.

Has Venezuela defaulted before?

Ten
times on international debt, mostly in the 19th century, according to
data from Harvard University economists Carmen Reinhart and Kenneth
Rogoff. Venezuela first defaulted in 1826, 15 years after declaring
independence from Spain.

Most recently, in 2005, it missed
payments on bonds linked to oil prices after the government fired
striking executives from PDVSA and the resulting chaos meant that the
prices needed to calculate the payments weren’t available. The bonds it
defaulted on were so-called Brady bonds, which were the result of a debt
restructuring following a default in 1990.

How would a Venezuelan default differ from Argentina’s?

With
any luck it won’t go on as long. Argentina’s default has dragged on for
14 years as successive governments have defied investors who refused to
accept losses of 70 cents on the dollar and fought them in U.S. courts.
Venezuela, on the other hand, would probably be motivated to settle
sooner in order to free up its oil shipments, according to Nomura.

Venezuela’s
bonds have collective-action clauses, which mean that reaching a
restructuring agreement with a majority of bondholders would require
everyone to go along with the deal. PDVSA notes don’t have that rule.
Investors are divided as to whether this makes default on one or the
other more likely or easier to resolve.

“Each sovereign default is
unique,” Siobhan Morden, the head of Latin American fixed-income
strategy at Nomura, wrote in a note to clients in February.

Is there any hope that things can get better?

There’s a case to be made that not all is lost.

First,
the government could implement reforms such as cutting subsidies on
gasoline or devaluing the currency, which would allow it to stretch its
dollar income much further. Bank of America Corp. says it expects
Venezuela to make all of this year’s bond payments, as long as it also
changes the currency regime, loosens price controls and cuts subsidies.

Second, the political opposition
is gaining ground. The opposition won two-thirds of the National
Assembly in elections late last year, giving it widespread powers to
dismiss ministers, block presidential decrees and block court
appointments.

Third, China could appear with new financing. The
Asian nation has already lent it about $17 billion and could presumably
come to the rescue again.

Fourth, oil prices could rise. The
country can scrape by with an average price this year of $50 to $65 a
barrel, according to estimates from Barclays, Bank of America and
Nomura.

Read the article online on Bloomberg here: Venezuela’s Descent Into World’s Riskiest Sovereign Credit: Q&A:

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