LatinFinance - January/February 2018 - 13

A question of when
Some analysts say it is difficult to determine how serious Venezuela
is about restructuring its debt after El Aissami's appointment. The
government will have to go on roadshows in New York and London
for a restructuring to have any chance of success, but such a trip
will be impossible with El Aissami in charge. Also, the government
has not hired an investment bank with significant restructuring
experience, and there is a dearth of knowledgeable technocrats in
the ranks of the civil service.
Venezuela has retained London-based Dentons as its legal
counsel, but David Syed, the lawyer leading the advisory team, had
to leave Orrick to take the case, after the US law firm refused to do
business with the Maduro administration.
"I think the government is playing games," says Daniel Osorio,
CEO of the hedge fund Andean Capital Management. "I believe they
want to get the price of the bonds down as low as they can, so they
can buy them back. That is one way carrying out a restructuring," he
says.
Experts are divided about whether the government has the
financial resources to avoid a full default. Siobhan Morden, head of
Latin America fixed income strategy at the Japanese financial firm
Nomura, suggests Venezuela may muddle through for another six
months or so. But, she says, it is simply a matter of when, not if, the
country falls into full default. "The government's cash flow stress is
so great that I believe a full default is inevitable" before the end of the
year, she says.
As violent protests against the Maduro administration broke
out last year, Venezuela's opposition took to calling the country's
sovereign notes "hunger bonds" and accused the government of
prioritizing foreign debt payments over food imports. The country
has slashed imports by 93% in the past five years to free up enough
dollars to meet its debt obligations. According to Capital Economics,
Venezuelan imports totaled $17.3 billion, as the government and
PDVSA faced $10.1 billion in principal and interest payments in 2017.
Oil, which accounts for more than 95% of Venezuela's exports,

Pending payments
Sovereign monthly external debt service ($ million)
Principal

Interest

3,000
2,500
2,000
1,500
1,000
500
0

Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19

It may be a political ruse. The government may want to show local
voters that the US government has blocked its efforts to restructure
its debt. If the negotiations fail, Edward Glossop, an emerging
markets economist at the London-based consulting firm Capital
Economics, expects Venezuelan officials will blame the Trump
administration.
Beyond sanctioning senior Venezuelan officials, the US Treasury
Department has also banned US citizens from buying new debt
issued by the Venezuelan government. A settlement like the one
creditors reached with Argentina in 2016 would be impossible
because US holders of existing debt would not be allowed to
exchange outstanding bonds for new notes. European investors are
still free to participate in any refinancing, but most of Venezuela's
debt is held in North America.
Some US investment banks had already become wary of dealing
in Venezuelan debt before the US government applied new sanctions
over the summer and fall. When Goldman Sachs paid $865 million in
May 2017 for PDVSA bonds with a face value of $2.8 billion, members
of Venezuela's opposition parties and many Venezuelan citizens
living in the United States accused the bank of helping to prop up the
Maduro administration.
Other major holders of Venezuelan and PDVSA bonds include
Fidelity Investment with $572 million, T. Rowe Price with $370
million, BlackRock with $222 million and Invesco with $113 million.

Source: Bloomberg and Moody's Investors Service

is becoming Venezuela's sole generator of hard currency. But oil
production is dropping around 15% per year and has fallen to
roughly 1.9 million barrels per day, with much of that shipped to
China and Russia as part of its debt payments. With optimistic
forecasts putting the price of oil at $55 per barrel, Venezuela faces
another $5 billion drop in oil export revenues in 2018. The main
question, according to Morden, is whether the economy can
withstand a 35% year-on-year decline in imports next year.
Pointing to the policies of former President Hugo Chávez, she says,
"This now forces a reassessment from within chavismo against a
status quo that ultimately forces a worse economic crisis from either
default or hyperinflation and a latent negative shock to governability.
"The clearly reactive and dogmatic President Maduro will finally
have to prepare for the worst," Morden says. "We do not assume a
sophisticated response that insulates their petrodollars or prevents a
disorderly default."
Fanciful chances
On the other hand, Torino Capital expects Venezuela to run a
current account surplus of $4.9 billion, with higher oil prices
compensating for the decline in production. In addition, external
financing constraints in 2018 will likely be similar to those in 2017,
meaning the country can still service its debt requirements if it
maintains imports.
"The fact that it has made principal payments as well as some
coupon payments suggests that it does intend to continue paying
and that it has the resources to do so," Rodríguez says. "It would have

FRANCISCO RODRÍGUEZ, TORINO CAPITAL

"I AM NOT SURE IF THE GOVERNMENT REALIZES THAT IT WILL
NOT BE ABLE TO BRING A RESTRUCTURING TO FRUITION"
January/February 2018 - L ATINFINA NCE.COM 13
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