S&P Rules Venezuela in Default on Interest Payment

By Julie Wernau and Anatoly Kurmanaev Features Dow Jones Newswires

Venezuela was ruled in default on a missed interest payment by S&P Global Ratings, pushing the cash-strapped South American country and its creditors one step closer to a reckoning of its $150 billion debt load.

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The decision by S&P, one of the two main U.S. rating companies along with Moody's Investors Service, capped off a day in which Venezuela promised to keep paying its debts at a conference in Caracas that was attended by few of the Western bondholders that are likely to be hit by a default.

S&P downgraded Venezuela's long-term debt rating to selective default late Monday after it said the government failed to make two bond coupon payments.

The rating firm's action could have far-reaching consequences for the country and its bondholders. It represents a potential new dilemma for the Venezuelan government, which has struggled to meet payment deadlines in recent months but until recently has just skated by.

The missed payments could allow investors to declare the government in default, which would enable bondholders to initiate defaults in other Venezuelan debt and set off a scramble for assets among the country's many and varied creditors, lawyers and analysts say.

Fitch Ratings also late Monday downgraded long-term foreign and local currency ratings on state-owned oil company Petroleos de Venezuela to restricted default. PdVSA also missed a payment due Monday.

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But the default rating isn't necessarily final. S&P said it can still reverse the downgrade if Venezuela makes the late payments before creditors organize and demand repayment, some analysts said.

Still, some market participants were already referring to Monday's missed payments as the long-awaited default for a government that has only about $10 billion in reserves and has been scrambling for months to meet its debt obligations.

"While our models have been pointing to Venezuela default as inevitable, it is incredibly sad to finally arrive at this devastating point," said Russ Dallen, managing partner at investment bank Caracas Capital Markets, which trades Venezuelan bonds.

Investors holding the bonds that S&P said were in default need a threshold of 25% of bondholders to demand full repayment, according to bond documents. Those bondholders could trigger cross-default provisions in other bonds. Moreover, investors can bring individual lawsuits for the missed payments.

Both Venezuela and Petróleos de Venezuela have fallen behind on several interest payments in recent weeks, taking advantage of a 30-day grace period. The interest payments that went into default were already late and on Monday exceeded the 30-day grace period.

President Nicolás Maduro and other Venezuelan government officials have insisted that they will pay off their debts even as most Venezuelan bonds have dropped below 30 cents on the dollar as investors prepare for a default.

Venezuelan officials provided few details about how they would move forward with a planned debt restructuring during a brief meeting with bondholders at the presidential palace Monday afternoon, according to people who said they attended it.

Most major investment funds skipped the Monday meeting with Mr. Maduro's restructuring commission, which included two officials blacklisted by the U.S. for alleged drug trafficking and corruption. None of the commission members have an economics or finance background.

On his weekly television show Sunday, Mr. Maduro said 414 investors had confirmed their participation for the meeting, which he said accounted for more than 90% of the country's creditors.

"Venezuela will never get to a default," Mr. Maduro said

The development follows years of increasingly restricted financing options for the South American nation. In August, U.S. President Donald Trump issued an executive order prohibiting U.S. institutions from trading new bonds that would serve to help finance Mr. Maduro's government, a move aimed at punishing the government for what the Trump administration called human-rights abuses and state-led corruption.

In addition to the publicly traded bonds, Venezuela owes money to Russia and China, faces battles from dozens of creditors with disputes related to nationalized assets, and is behind on payments to suppliers. Estimates of Venezuela's total outstanding debt vary, with some analyses putting the figure between $100 billion and $150 billion.

"You have an extremely complex, heterogeneous and messy set of debt instruments that create this very diverse set of rights for creditors and will make it legally difficult for everybody to come along on a new deal," said Robert Kahn, Steven A. Tananbaum senior fellow for international economics at the Council on Foreign Relations.

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

(END) Dow Jones Newswires

November 13, 2017 23:26 ET (04:26 GMT)