Venezuela is one of the richest countries in Latin America and has the world’s largest oil reserves. But it also has too much debt, severe corruption, and related economic, political, and social problems. What unfolds there will make it a top restructuring story in 2018 and beyond.
Venezuela’s plight might seem curious given its wealth and oil reserves. But the country’s poverty rate is at 82 percent, and many of its 30 million citizens reportedly live on just $8 a month. Some are moving to other South American countries or elsewhere. Others who remain are starving and lack enough medicine.
The currency, the bolivar, is worth less than a 0.1 U.S. penny. Economists say that inflation this year could reach 30,000 percent and may even soar to 100,000 percent. Corruption and cronyism in Venezuela are widespread. The new head of the state-owned oil company, for instance, is a National Guard general with no experience in the oil industry.
A big source of its economic problems is Venezuela’s debt burden: at least $120 billion (and potentially much more), including $60 billion of foreign-owned bond debt. Venezuela took on a lot of debt when oil reached $100 a barrel. The decline in oil prices over the past three years then set the stage for the current crisis.
In November, the state-run oil company, Petroleos de Venezuela (PDVSA), failed to make a $1.12 billion bond payment, and the Venezuelan electric company, Copoelec, didn’t make a $28 million interest payment. PDVSA has made some recent coupon payments, but by the start of 2018, late payments due on both sovereign and PDVSA debt totaled more than $1.5 billion.
The emerging market trade group EMTA said the sovereign bonds should be traded “flat”—with no accrued interest—as if the bonds were in default. The International Swaps and Derivatives Association declared a “credit event,” which prompted payment of credit default swaps. When PDVSA failed to make coupon payments within a grace period, S&P Global Ratings lowered its rating on PDVSA to “selective default.” When PDVSA made late principal payments on certain notes, Fitch downgraded PDVSA to “payment default.”
As all of this took place last fall, President Nicolas Maduro vowed that Venezuela would never default on its debt and summoned creditors to Caracas to start restructuring talks. He predicted that 414 investment bankers, or 91 percent of the country’s bondholders, would attend. But news reports afterward said fewer than 100 were there, and the meeting ended within a half-hour.
Many creditors stayed home because of sanctions imposed by the United States. On August 25, 2017, President Trump signed an executive order sanctioning Venezuela for undermining democracy, corruption, and human rights violations. The U.S. ambassador to the United Nations, Nikki Haley, has referred to Venezuela as “an increasingly violent narco state that threatens the region, the hemisphere, and the world.” The sanctions prohibit U.S. banks from buying bonds and negotiating with Venezuela, and Americans cannot trade new debt issued by Venezuela or PDVSA.
The United States has also sanctioned 44 Venezuelan officials and frozen the assets of at least 14. These include Maduro, who the United States has labeled a “dictator,” and two of the leading negotiators for the restructuring. One is Finance Minister Simon Zerpa, who has been sanctioned for corruption, and the other is Vice President Tareck El Aissami, who has been sanctioned for drug trafficking. The U.S. Treasury Department has called him a drug kingpin and banned U.S. citizens from having contact with him.
Many analysts say that Venezuela would default the sovereign debt before the PDVSA bonds. For one thing, $6 billion comes due this year on the sovereign debt, whereas $2.9 billion comes due on the PDVSA bonds. In addition, if PDVSA bonds default, then creditors will likely seek to seize its assets located outside of Venezuela, such as oil on ships and the U.S. oil refiner Citgo. (At least one judgment creditor of Venezuela, Cyrstallex International, has argued in court that Venezuela and PDVSA are alter egos in an effort to seek collection against shares of Citgo’s U.S. parent company.)
The sovereign debt could be easier to restructure because 12 of 14 issues have collective action clauses (CACs). These enable a 75 percent supermajority of holders to reach a deal on terms and bind dissenting holders. In contrast, the PDVSA bonds don’t have CACs, and thus new terms would require the consent of all holders. But any restructuring will involve many more factors and complexities. For instance, the PDVSA bonds were issued under trust indentures, whereas the sovereign debt was issued pursuant to fiscal agency structures. Some observers believe that terms in the indentures and governing law might make it easier for the PDVSA bonds to be restructured while also limiting the ability of holdouts to thwart a resolution.
Just what will happen this year could depend in large part on Maduro. A former bus driver and union leader, he has been in power since former President Hugo Chavez died in 2013. Maduro is up for re-election on April 22. He should win another six-year term because he has no organized challengers. Opposition parties say they will boycott the election. Maduro's hold on power also has the support of the nation’s military. Some observers believe Maduro could be ousted only if the military abandons him, but there’s no sign of that happening.
Maduro blames the United States for his country’s woes but thinks he’s found a remedy: a cryptocurrency. He plans to back the currency with the nation’s reserves of oil, gas, gold, and diamonds. The portion to be backed by oil reserves, the “petro,” will be issued at a projected value of $5.9 billion. Curiously, cryptocurrencies typically aren’t backed by governments or central banks, and many of Venezuela’s assets have already been pledged, so it’s dubious if this plan will work.
Venezuela will also likely seek help from two countries that have previously supported it: Russia and China. In November, Russia agreed to restructure Venezuela’s $3.1 billion debt. Venezuela also began negotiating new deals with Russia’s state-run oil entity, Rosneft, and agreed to permit the company to develop two offshore gas fields.
From 2007 to 2016, China’s state-owned banks loaned Venezuela a reported $60 billion. Some observers say that Beijing takes a long-term approach to such investments, but a recent lawsuit shows that its patience and support have limits. In November, a state-owned gas company, Sinopec, sued PDVSA for breach of contract and conspiracy to defraud.
But no matter what Russia and China do, Venezuela will need to grapple with the foreign bond debt and the obstacles posed by the U.S. sanctions. How all of this will unfold and how long it will take to resolve are, of course, uncertain. But this promises to be a big and complex restructuring story this year and in the future.