It has been long expected, but its happening still caused meaningful price dislocation. Two weeks ago, President Maduro of Venezuela announced that the country would restructure its debts. As a result, so far this month Venezuelan dollar bonds have delivered an -18.5% return.
At the start of the month, even though they were already trading at an average price of 46c/$, these bonds still made up a meaningful 1.8% of the flagship emerging market dollar bond index. So even if you were only neutral Venezuelan debt, the past couple of weeks have cost you a decent clip of performance.
Kames doesn’t own any Venezuelan debt, and here’s a few reasons why:
- Debt restructurings are massively complex…: That Mr Maduro tasked his Vice President, Tareck El Aissami, whom the US sanctions as a drug trafficking kingpin, to lead negotiations on the Venezuelan side, betrays the Chavistas’ woeful under-estimation, and probable misunderstanding, of what they are trying to achieve.
- … and Venezuela’s looks like being the most complex of all: More important than individuals, though, are the US financial sanctions currently aimed at Venezuela. Yet, very many Venezuelan bondholders sit in the US, and a great deal of Venezuela’s oil, its lifeblood, is sold to US buyers. Restructuring under these circumstances seems practically impossible. And what about all the other creditors (international airlines with trapped dollars, for example) eyeing this situation with interest?
- Domestic politics offers little upside: While Mr Maduro and Chavismo currently appear to hold the upper hand in Venezuelan politics, if the regime collapses, it’s unlikely that that which follows it would be nearly as assiduous in servicing its debts. In particular, if the IMF became involved alongside a new regime, expect it to take a dim view of international bondholders. And if the current regime survives? Expect more of today’s confusion.
- China and Russia: Both are meaningful lenders to Venezuela. The opportunity for Russia, in particular, to keep the Maduro regime in power, and its debt servicing (barely) current, may be too good to pass up. It can thus get one over on the US, and its investors, on territory ‘close to home’. Sovereign actors with very different motivations and understandings could lead this situation to bump along the bottom for some time.
All that said, eventual recovery values for Venezuelan dollar bonds may well prove to be higher than the levels at which they trade today (in the 20s and 30s). However, both the pathway and timescale to these higher values are highly uncertain – arguably, impossible to read.
If your fund manager holds Venezuelan debt, he or she must think differently. We note that JP Morgan has said that Venezuelan bonds will remain in its emerging market sovereign bond indices, despite default. Could it be that, despite all the opacity and uncertainty around the situation, fund managers are too scared to take a view, and some benchmark risk, here?
From our perspective, we think there are currently plenty of other, more decipherable, investment opportunities across the emerging market debt universe. Venezuela doesn’t pose contagion risk to the wider asset class, we think, so we remain happily pursuing these opportunities.