Venezuela ruled in default by trade group after bond payment delays

Venezuela’s cash-strapped government has defaulted on sovereign debt and bonds issued by state oil firm PDVSA after failing to make timely payments, a New York-based derivatives group ruled on Thursday.

The International Swaps and Derivatives Association (ISDA) committee’s unanimous decision that the delays constitute a “credit event” triggers limited payouts on credit default swaps (CDS).

But investors said they did not expect a significant market reaction from the ISDA decision, given that Venezuela is making efforts to pay, and that holders of some of the world’s highest yielding debt have so far been tolerant of the delays.

They also noted that the values of the CDS - the derivative contracts investors use to protect themselves against a default - were not large compared to the overall bond amounts.

The net value of CDS on Venezuela’s sovereign bonds is about 1.3 billion dollars.

For PDVSA, the net value is around 250 million dollars.

The ISDA committee said it would reconvene on Monday at 3 p.m. New York time (20:00 GMT) to discuss an auction that will eventually determine the amount paid out to buyers of CDS protection.

Venezuela, reeling from a four-year recession that has led to widespread shortages of food and basic goods, said on Wednesday it had started transferring 200 million dollars in interest payments on sovereign bonds which mature in 2019 and 2024.

PDVSA also said it made the interest payment on its 2027 bond and “successfully completed” capital payments on the 2020 and 2017N bonds.

Two ratings agencies declared President Nicolas Maduro’s government in “selective default” earlier this week for failing to make overdue coupon payments within a grace period.

Venezuela's President Nicolas Maduro speaks during an event with supporters in Caracas, Venezuela November 15, 2017.

Bondholders Staying calm

All 15 members of ISDA’s financial committee voted in favor of statements that “a failure to pay credit event had occurred with respect” to Venezuela and PDVSA.

The ISDA committee members are global financial institutions that include Bank of America, Barclays Bank, Credit Suisse, Deutsche Bank and Goldman Sachs.

Investors said the ISDA decision would not rattle markets, however, given Venezuela’s efforts to pay - albeit late.

“This is just a continuation of bad headlines,” said Ray Zucaro, chief investment officer at RVX Asset Management.

“But as long as the government tries to pay, and bondholders get their late payments, they’re really not incentivized to do anything ... It’s a really unusual situation.”

Venezuelan bond prices have been on a roller-coaster over the past two weeks, as Maduro called investors to inconclusive debt restructuring talks, while also pledging to keep honoring the OPEC nation’s obligations.

Venezuelan officials blame payment delays on US sanctions, which have made banks warier of dealing with funds from Caracas, thus clogging transfers.

Venezuela and PDVSA have around 60 billion dollars in outstanding bonds, while private estimates put total foreign debt between 120 billion dollars and 140 billion dollars.

One source at a large holder of Venezuela bonds said investors were holding back from an aggressive course of action against the Maduro government while payments were still coming through.

“Even after the ISDA decision, it’s not the best idea for anyone to accelerate a default if there’s a chance they are going to be able to receive an amortization or interest payment any time soon,” the source said.

“As long as Venezuela and PDVSA pay, most bondholders will likely prefer to deal with the delays.”

(REUTERS)