Cost to Insure Against a Venezuela Default Hits Record

By Julie Wernau Features Dow Jones Newswires

The cost to insure against a debt default in Venezuela rose to an all-time high Wednesday, reflecting growing investor concern that the country isn't following through on the president's pledge to make the most recent payment.

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Some bondholders and analysts said there was no evidence that state-owned Petróleos de Venezuela, SA made a $1.1 billion bond payment that was due Nov. 2. The firm needed to pay by the end of a three-day grace period to avoid potentially triggering billions of dollars in credit default swaps, a kind of insurance that pays out in the event of a default, according to the rules that govern the contracts.

The credit default swap market was indicating a 91.3% probability of default in Venezuela by the end of 2018, compared with a 75% probability last week, according to investment bank Bulltick Capital.

Investors have to pay $15 million a year to insure against the default of a notional $10 million of Venezuela's one-year bonds, the firm said. That compares with the $7.6 million cost on Nov. 2 and lows of $739,000 in 2014. Bulltick Capital said the fact that the annual premium exceeds the amount insured shows that the market believes a default will likely occur much sooner than in one year.

"Spikes of this type happen when the market expects a default," said Juan I. Sosa, co-chairman of Portfolio Resources Group Inc. in Miami, which trades Venezuelan bonds. "People using this insurance are now so certain that it's going to happen that they are willing to pay twice as much as they were a week ago. That is a measure of fear."

PdVSA and Venezuela's government didn't immediately respond to requests for comment.

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Before the contracts pay out, CDS investors must ask the International Swaps and Derivatives Association to rule on whether credit default swaps have been triggered.

Following months of speculation about cash-strapped Venezuela's ability to pay billions due on bonds issued by PdVSA, President Nicolás Maduro said last week that he would make a final principal payment for bonds that matured Nov. 2 and then seek to restructure the country's remaining debt.

Mr. Maduro said he formed a committee charged with handling the restructuring and invited bondholders to attend a meeting in Caracas on Nov. 13. But bondholders and attorneys who deal in restructuring sovereign debt have said that it's unlikely U.S.-based investors will attend because U.S. sanctions restrict their dealings with Mr. Maduro's administration.

On Tuesday, more than 200 investors, including large holders of Venezuelan debt, took part in a phone call with attorneys to discuss their options, according to a person on the call.

One bondholder said the presence of U.S. sanctions is an obstacle to restructuring talks. Even if there were a payout in the CDS market, he said he thought bondholders who could push for a widespread default were unlikely to do so if the funds that were due last week arrive in bank accounts Wednesday.

If PdVSA fails to pay the $1.1 billion principal payment due Nov. 2, holders of at least a quarter of those bonds can declare a default and accelerate the bonds, which would trigger cross-default provisions in $28 billion of PdVSA bonds, said Stuart Culverhouse, head of macro and fixed income research at the specialist frontier and emerging markets investment bank, Exotix Capital.

"It is up to holders to decide what to do. It is possible they don't choose to accelerate," he said.

Venezuela has had an increasingly difficult time making on-time payments on its bonds, at times blaming U.S. sanctions for delays with its international banking partners.

After announcing the planned restructuring, the government denounced what it called "the insolent imperial policy of domination and economic asphyxiation" by the U.S. government.

Write to Julie Wernau at Julie.Wernau@wsj.com

(END) Dow Jones Newswires

November 08, 2017 13:41 ET (18:41 GMT)