Credit Markets: Venezuela Bonds Rise on Payment Pledge -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 28, 2017).

Venezuelan bonds rallied after the country's state-owned oil company said it would make a debt payment that was due Friday, allaying concerns that a default was imminent.

The bond in question, the Petróleos de Venezuela SA bond maturing Oct. 27, 2020, gained 5% to 85.76 cents on the dollar as of midday Friday, according to MarketAxess BondTicker. The PdVSA bond due on Nov. 2, 2017, added 4.9% to 97 cents on the dollar.

PdVSA said in a statement that it had begun making the corresponding bank transfers to accounts managed by J.P. Morgan Chase & Co. used to pay bondholders the $842 million in principal due Friday. It didn't specify if it would make the interest payment that also was due, which Bank of America Merrill Lynch said amounts to $143 million.

The status of the payment process wasn't immediately clear Friday. Paying agent Delaware Trust Company, the administrator set up to receive the funds, said the payment hadn't been received at the 10 a.m. ET deadline.

Both the country and PdVSA have fallen behind on several interest payments in recent weeks, which have a 30-day grace period. But there is no grace period for the principal payment in Venezuelan bonds, according to bond documents, meaning a delay could lead to a default.

The strategy of prioritizing the payments that are immediately due shows that "it is a country and a company that continues to be in financial stress," said Russ Dallen, managing partner at investment bank Caracas Capital Markets, which trades Venezuelan bonds. "They are using the same 30-day grace period to delay payments on all of the coupons they have been late on," he said.

Venezuela's information ministry didn't respond to a request for comment.

President Nicolás Maduro and other Venezuelan government officials have said they would pay off their debt, and in recent years investors have been rewarded with some of the best returns in emerging markets. The Venezuela portion of a key emerging-market bond index, the J.P. Morgan EMBI Global Diversified, is up 57% from the beginning of 2015 through Thursday versus 21.2% for the broader index.

But some investors remain nervous about future debt obligations. The country has a $1.2 billion payment due Nov. 2, with Venezuela's economy in deep recession and as Mr. Maduro's increasingly authoritarian government faces U.S. sanctions. The South American country is stretched for cash with prices for oil, its main export, still at half the level of three years ago.

But while it has slashed food and medicine imports, the Maduro administration has continued to pay bondholders. Some analysts say a default would paralyze its vital oil industry, leaving foreign assets and crude tankers vulnerable to seizure by creditors seeking compensation.

"I really want to emphasize how day-to-day the situation is," said Patrick Esteruelas, head of research at EMSO Asset Management. "Just because they've secured enough to make today's payment doesn't mean that they have the money to pay next week."

Mr. Esteruelas said he thinks PdVSA is buying as much time as possible, knowing that even if the company misses Friday's deadline it likely will take time for bond investors and those in the credit default-swap market to declare a default. A PdVSA spokesman didn't immediately respond to calls and emails seeking comment.

Bond investors remain divided as to whether Venezuela will stay current on its debt, in part because of the lack of economic data released by Venezuela that analysts could use to gauge the country's finances.

"There're still some question marks about whether they will make that timely payment" of debt due Friday and next week, said Daniel Senecal, a portfolio manager at Newfleet Asset Management, which owns bonds issued by both Venezuela and its oil company. Mr. Senecal said he continues to own Venezuelan debt because he thinks the bonds would be worth more if the country restructures its debt.

Some large investors recently have moved into longer-maturity bonds because they believe a default would unseat the current government, lead to an orderly restructuring under a new government and mean lucrative recoveries for bonds they bought cheaply during the crisis.

"I don't think we're going to see a default here. I think these bonds are going to be paid," said Jan Dehn, head of research at fund manager Ashmore Group in London. Mr. Dehn said that if a default occurs, he would buy more Venezuelan debt during a likely selloff.

"Once you come out on the other side of this, you're going to make a lot of money," Mr. Dehn said.

The PdVSA Twitter account sent out several English-language messages regarding the debt deadline on Friday. "The Bolivarian Republic of Venezuela, through PDVSA, has consistently honored its obligations...thus proving wrong the doomsayers that bet on the economic ruin of the country and attack the Venezuelan people..." some of the tweets said.

Write to Julie Wernau at Julie.Wernau@wsj.com, Carolyn Cui at carolyn.cui@wsj.com and Kejal Vyas at kejal.vyas@wsj.com

(END) Dow Jones Newswires

October 28, 2017 02:47 ET (06:47 GMT)