Venezuelan Default Fears Rise With Billions in Debt Coming Due Soon -- Update

By Julie Wernau and Carolyn Cui Features Dow Jones Newswires

Investors have been bracing for a Venezuela debt default for more than a year, but fallout from the country's widely criticized election last weekend could prove to be the tipping point.

Continue Reading Below

The government and state-owned oil company Petróleos de Venezuela SA together owe $5 billion in principal and interest payments due between now and the end of the year, according to Caracas Capital Markets. The country has $725 million due this month alone, the Venezuelan investment bank said.

The problem: Venezuela only has about $3 billion of its foreign reserves in cash, according to S&P Global Ratings. That means the country is dependent on oil exports to make up the difference.

The U.S. government has been threatening tough sanctions to punish President Nicolás Maduro for what Washington and other governments have called an illegal vote on Sunday, designed to advance the president's power. Mr. Maduro has said that the vote was necessary to give the government power to fix Venezuela's political and economic crises and put an end to antigovernment protests.

While the Trump administration on Monday imposed new sanctions against Mr. Maduro personally, it hasn't ruled out restrictions on Venezuelan oil trade that could deprive the government of its only real source of cash.

The Venezuelan government didn't respond to requests for comment Tuesday.

Continue Reading Below

"There's a huge dependency on exports to the United States at a time of profound economic turbulence. It would be basically cutting off the single most important source of revenue. It would significantly raise the risks of default," said Roberto Simon, lead analyst for Latin America in the geopolitical intelligence team at FTI Consulting.

Venezuela exports 780,000 barrels of oil a day to the U.S., accounting for 49% of its oil exports, according to Torino Capital LLC. The U.S. is also weighing restrictions on Venezuela's imports of U.S. oil, which would impede Venezuela's ability to produce oil for export.

In a sign of growing investor nervousness, Venezuela's credit-default swap spreads -- -a form of insurance on the possibility of a default -- spiked on Friday, with the probability of default within a year reaching 62%, the highest since February 2016, when oil fell below $30 a barrel, according to Victor Fu, an emerging-market strategist at Stifel Nicolaus & Co.

Prices for PdVSA bonds due in November have dropped 3.5% since the last trading day before Sunday's election, according to Thomson Reuters data. The bonds are down 16.4% since the beginning of July. Venezuela's bonds due in 2038 have dropped 4.5% since before the election and are down 11% since the beginning of July.

Not everyone is convinced a default is forthcoming, even if there were additional U.S. sanctions. "If only sanctions to exports of oil from U.S. to Venezuela are enacted we think the downside will be limited as we think that would not be enough by itself to trigger a default this year," Bank of America Merrill Lynch said in a note Monday.

But if Venezuela does miss a payment, some experts say the default would likely make it among the largest in history. While it is difficult to know exactly how much Venezuela owes in external debt, some estimates say the figure approaches $150 billion.

A default would likely cause oil prices to spike, though it is unlikely to spill over to other bond markets because Venezuela's economy isn't closely linked with others and many investors have already gotten out of Venezuelan bonds in preparation for a default, some analysts say.

A default could also free up more cash for the government to spend on desperately needed food and medical imports. Yet it could soon exacerbate the country's economic crisis, as creditors seek to seize oil assets and cut off the country's remaining supplies of financing, according to risk consultancy Eurasia Group.

Venezuelan bonds have been widely held by both passive investors and active money managers because they are in the major emerging-market bond indexes, with $342 billion tracking the J.P. Morgan EMBI bond indexes that contain Venezuelan bonds.

Venezuela's bonds have outperformed the benchmark index by a wide margin through much of the country's economic crisis. Venezuela's portion of that benchmark returned 121% from a trough in February 2016 through early March of this year, according to UBS Wealth Management. They were the largest contributors to emerging-market bond returns last year.

Part of the reason is Mr. Maduro has been determined to pay Venezuela's debts, fearing that any default could enable creditors to seize the country's oil shipments and energy assets. Short on cash, Venezuela has been ravaged by food shortages, high inflation and violent clashes with protesters.

The country's international reserves briefly dipped below $10 billion in recent days -- its lowest in 15 years, according to Venezuela's central bank. S&P estimated about $7 billion of those reserves are in gold, which wouldn't be easy to sell in bulk to meet debt interest payments.

A white paper from sovereign debt attorney Lee Buchheit and Duke Law's Mitu Gulati warned off bondholders who have been buying into PdVSA debt in Venezuela with the expectation that they will be able to hold out for a big payday post-default.

The bonds don't have collective-action clauses that force the minority of bondholders to go along with a supermajority of holders, which has led some legal experts to say that a default could lead bondholders to seize assets and hold up restructuring efforts. Messrs. Buchheit and Gulati say Venezuela has several legal maneuvers available to it that could make collecting on those debts difficult.

Still, some investors are betting that the worst-case scenarios won't come to pass, and their investment will continue to pay off.

Mr. Fu at Stifel was encouraging investors to snatch up certain PdVSA bonds as well as Venezuela's bonds due 2023, which have slumped, in the case that the U.S. doesn't sanction imports of Venezuelan oil.

--Ryan Dube contributed to this article.

Write to Julie Wernau at Julie.Wernau@wsj.com and Carolyn Cui at carolyn.cui@wsj.com

(END) Dow Jones Newswires

August 02, 2017 11:27 ET (15:27 GMT)