Home' Trinidad and Tobago Guardian : June 15th 2017 Contents BG22 | REGIONAL
BUSINESS GUARDIAN guardian.co.tt JUNE 15 • 2017
Venezuela defaults on Russia
Venezuela defaulted on part of its US$2.5 bil-
lion loan from Russia's state-controlled oil
company Rosneft once again, giving Wall
Street bond lords cause for concern that a
default on PDVSA oil bonds is right around
the corner. PDVSA is a quasi-sovereign and
is the government's only remaining cash cow. The government
owed Rosneft a reported US$950 million.
News of the missed payment sent Venezuela's US$3 billion
government bond due 2022 to trade at around 57 cents, for an
annualised yield of 29.3 per cent for those lucky enough to
be buyers at those levels. Assuming the par value of the bond
was US$100, that means the bond is now worth US$57. Some
bondholders in London immediately questioned whether or not
the missed Russia payment constituted a default, the Finan-
cial Times reported. The International Swaps and Derivatives
Association said it did not.
Investors have been waiting for an official default for nearly
a year now. Venezuela keeps pulling a rabbit out of its hat.
Last month, Goldman Sachs "loaned" the government US$2.8
billion by buying distressed PDVSA bonds.
The purchase sent the anti-PSUV crowd into the streets of
New York, calling into question the beating, bleeding heart of
the famous American "vampire squid." In its original statement,
Goldman said: "We recognise that the situation is complex
and evolving and that Venezuela is in crisis. We agree that life
there has to get better, and we made the investment in part
because we believe it will."
But it has not. Venezuela is getting worse. And paying bond-
holders may prove to be highly unpopular for the United So-
cialists of Venezuela (PSUV), a party whose soul rests on an
anticolonial narrative spun by the late Hugo Chavez. Chavez
made going against Washington free traders and capitalist
pigs his calling card. It is hard to imagine a PSUV-controlled
government siding with Wall Street over poor people, but so
far, that has been the case. This is a ticking time bomb waiting
Cash flow concerns continue. To make matters worse, a
Delaware court granted Canadian miner Crystallex Interna-
tional a US$1.4 billion arbitral award against the Venezuelan
government on June 12. The Venezuelan government was
found attempting to evade payment to Crystallex by moving
its assets out of the US and into Delaware subsidiaries of a
These recurrent themes of missed payments and late pay-
ments and now the Cyrstallex arbitration ruling all add to cash
flow stress. Holders of PDVSA bonds will have to tend with
falling bond prices and hope their hefty interest payments are
not wiped out by capital losses in a hard default.
Venezuela's political crisis has yet to lead to regime change.
Nicolas Maduro is still in power following two months of daily
protests calling for his ouster. PSUV is holding on tight like
For Goldman Sachs' PDVSA bonds, the more important near-
term outlook relates to oil. If oil prices don't fall too much,
PDVSA can keep the lights on.
"We cannot predict the exact timing of either regime change
or a hard default," says Siobhan Morden, a managing director
for Nomura Securities in New York. She is still holding out for a
"muddling through" and no default in order to avoid a backlash
of further economic stress. A default means companies like
Rosneft and Goldman Sachs stop funding Venezuela. Then
the country essentially goes bankrupt.
The biggest risk is if PSUV supporters manage to convince
the government that it should use the money to support the
poor instead of making interest payments. So far, disdain for
PSUV is so great that even Maduro and die-hard Chavistas
have not been able to get that message across successfully.
The World Bank recently forecast Venezuela's GDP to contract
this year and in 2018.
Goldman Sachs may walk away from this with a huge pay-
day, and the Russians may yet get paid. Nomura's in-house
cash flow analysis shows a neutral position this year with even
higher conviction if oil remains stable.
Venezuela has an estimated US$243 million in bond payments
due later this month and another US$70 million in July. There's
not much cushion for liabilities like the Russian loan and the
Crystallex award, both now a serious overhang.
"Venezuela continues to pursue delay tactics on appealing
these judgments to avoid a technical default," Morden says
about Crystallex in particular.
Despite the view from Chavez and his ilk, Venezuela's gov-
ernment seems less fond of the Russians and the Chinese.
Even the Canadians. It is the Americans bond fund manager
getting paid first.
In February, PDVSA fell months behind on shipments of
crude and fuel under an oil-for-loan deal with both China and
Russia, according to internal company documents reviewed by
Reuters. Russia and China have loaned some US$55 billion to
the country over the last three years, with most of it coming
So far, US investors have only been impacted by rumours of
missed payments crushing PDVSA bond prices, rather than
an actual PDVSA bond default. Goldman Sachs Asset Man-
agement purchase PDVSA bonds for 31 cents on the dollar, a
flea market sale of nearly 70 per cent from par value and with
super-high yield in dollars. It was a gamble that Venezuela
eventually gets its act together.
Unless PSUV cancels democratic elections, this party might
not last another two years. The general election is scheduled
for October 2018. AP
Is Goldman Sachs next?
Nicolas Maduro waves to
supporters outside the
National Electoral Council
headquarters, in Caracas,
Anti-government protesters carry a poster with a portrait of
Cuba's President Raul Castro reading in Spanish "Your true
boss" in Caracas, Venezuela, Saturday, June 10, 2017.
A government supporter holds a small copy of Venezuela's
constitution as she argues with opposition members outside
the Supreme Court where opposition protesters gathered to
show support for the chief prosecutor's motion to stop
President Nicolas Maduro's push to rewrite the constitution
Caracas, Venezuela, Monday, June 12, 2017.
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