Venezuela's long defaulted bonds are approaching Sunday's potentially crucial presidential election trading close to their highest levels in years. Although investors remain sceptical that the opposition's huge lead in polls will translate into Nicolás Maduro leaving office, one of the largest and most complex debt restructurings of all time — with a potentially lucrative payout for some — is finally appearing on the horizon.
Including bonds issued by the sovereign, state oil company PDVSA, and utility Elecar, holders of Venezuelan bonds have claims reaching over $90bn when including accrued interest. Having been in default since 2017, talk of a restructuring is finally emerging. For now, the talk is mostly vague and hypothetical. Uncertainty is high, and negotiations may take years to begin. But it is too big to ignore.
"Although they've pulled back a little this week, Venezuela bonds are still up more than 10% month-to-date," said Jared Lou, EM portfolio manager at William Blair. "On one hand I think it's because of the formation of the creditor committee, with people thinking an NDA might be closer than we realized. On the other, the huge gap in polls could just be too high for Maduro to overcome in a legitimate election.”
According to data from MarketAxess, PDVSA's 6% 2026s traded at new recent highs of 14.375 cents on the dollar on Thursday, having started the month below 12. The Venezuela 9.25% 2027s hit a new high of 22 cents on the dollar, two points higher than two days earlier and up from below 18 on July 1.
Eternal hope
A group of international investors — including Fidelity Investments, GMO, Greylock Capital, Mangart Capital and T Rowe Price — hired Orrick, Herrington & Sutcliffe as adviser in June in preparation for what they expect to be “a comprehensive and negotiated resolution” of Venezuela’s public debt default. But there are several hurdles to overcome first, beginning with what looks to be the most unpredictable election in Venezuela in 25 years.
"Hope springs eternal and the fact the bonds are trading at the high end of their recent ranges shows that," said Daniel Osorio, president of Andean Capital Advisors, which advises institutional asset managers on Latin American politics, economics and capital markets. "If there is a transition, the new government will have to restructure its liabilities, and if we see a potential restructuring two years down the road, there'd be reason for the bonds to rally."
Some investors said that an opposition government could lead to an immediate bond rally of around 10 points.
Venezuela's opposition is as united as it has ever been since Hugo Chávez took office as president in 1999, and its candidate Edmundo González is leading polls by more than 20 points. But uncertainty is extremely high.
“Anything could happen," said Philip Fielding, co-head of EM debt at MacKay Shields. "Maduro may try and cancel [the elections], but sanctions were lifted on the basis that he promised these elections. He can only steal them if the result is close, [but] the opposition are miles ahead in polls.”
At this late stage, the vote is broadly expected to go ahead as planned — which is already a surprise to the upside versus many people's expectations just a few weeks ago. Eyes are now fixed on whether the government attempts to manipulate either the voting or the results.
Osorio argued that "the reality is that [an opposition government] is very unlikely to occur".
"I don't see a scenario where there's a peaceful transition of power," said Osorio. "It would be logical to offer Maduro safe passage somewhere to ensure this, but the amount of corruption, graft and crimes against humanity is such that the people you'd have to amnesty are so many that it's impossible. And then there are plenty of external powers that don't want Maduro to go anywhere. It is not simple."
None of the EM investors that GlobalCapital spoke to were confident that the opposition's tremendous momentum would translate into an opposition government. As JP Morgan strategists noted this week, the market has "perked up, but remains cautious". Today's valuations reflects the "low probability" of a clear and undisputed outcome, said the US bank.
"My view is that Maduro wins, there are shenanigans to make that happen, and it will be hard for the US to recognise his win," said Kate Moreton, EM analyst at Columbia Threadneedle.
Between 2018 and October 2023, US Treasury sanctions meant that US-based bond investors were barred from trading Venezuelan securities. Those accounts that could pick up bonds in that time were able to do so at rock bottom prices, meaning any kind of debt restructuring and accompanying economic recovery may eventual provide exceptional returns.
"European fund managers, or Middle Eastern sovereign wealth funds, or other groups that could have picked up these bonds at five cents on the dollar during the sanctions are of course very much up for discussing restructuring possibilities," said Osorio. "They are already so far in the money. But I don't see a restructuring in Venezuela within three years — even in a best case scenario."
Indeed, most EM real money investors appear to be unwilling to go out on a limb either way, with mostly market weight positions reflecting the fact that the path to a political transition still looks perilous, yet also that the upside is potentially enormous if there's a government in place able to build an economic recovery with international support. With Venezuela's bonds back in JP Morgan's EM indices, these types of investors can't afford to risk missing out.
Maduro manoeuvres
The consensus view appeared to be that, without a change in administration, a restructuring is nigh-on impossible.
"It's hard to see a restructuring under a Maduro government," said Moreton at Columbia Threadneedle. "We need the US to recognise the result, and for them to lift primary market sanctions, which I think is hard to see happening any time soon."
Even if there is a change in government, the trade remains a complex one.
"There is a cap on prices because even if Maduro does cede power, there's still no economic data, or clarity on how this moves forward," said Moreton. "There's now a six month period between the election and taking office, and there would undoubtedly be some negotiations between Maduro and his friends, so there will be time [to play the upside trade]."
Although the Treasury has lifted the ban on trading Venezuelan securities in the secondary market, US persons and entities still cannot buy them in the primary market — meaning the necessary new financing portion of any debt restructuring would be impossible.
Yet some of the more optimistic investment managers out there — especially those not tied to the indices — believe there is a chance that even a Maduro government could ultimately bring a resolution for Venezuela's debt stock, and that the US has a vested interest in normalising relations with the country. It has already scaled back trade and financial sanctions on the country in return for these promised elections.
"Our view is that the bar for the US recognising Maduro is extremely low," said one US-based investor. "The policy of dual governments [when the US recognised opposition senate leader Juan Guaidó as president even as Maduro remained in power] was a monumental failure that put US foreign policy in a limbo. Unless there's a major, major fraud there's a probability of the US recognising Maduro — though I don't expect it to happen on July 29.
"Venezuela's immigration problem is a huge issue for everybody, so I think returning to the stick approach of returning to more sanctions is out of the question."
Some bond analysts, more accustomed to scrutinising balance sheets, are now left examining different types of electoral fraud. One said that a tampering with machines or failure to show results would be unpalatable for international observers, but that it may be easier to turn a blind eye to some of the more subtle rumoured tactics — such as closing polling stations early or late depending on an area's political leanings.
"Honestly we think the US will close its eyes and pretend there was no foul play," said one sell-side credit analyst. "Maduro just has to be artistic about stealing the election."
Maduro's government hired Rothschild two years ago to advise on its debt, a sign that it does intend to eventually deal with the problem. And the US-based investor believes there's an argument that, when negotiating debt, Maduro may even be a better counterparty than a hypothetical opposition government.
"There's a possibility that the opposition argues the bonds were not valid debt as they were issued by Chávez," he said. "Obviously there's a real possibility that the situation disintegrates into an escalation of uncertainty, or even worse disorder and violence, but I think there's a two in three chance that the result will be workable for bondholders."
Long road back
Still, it will be a complicated task. With other obligations, including legal judgements on lost investments, Venezuela is believed to owe over $150bn. Moreover, with GDP having plummeted from around $400bn to an estimated $100bn — though based on limited available data — an economic recovery to pair with a restructured debt pile still looks some way away.
“If you can’t put a number on GDP, how can you work out what haircut is needed in a restructuring?” said Fielding at Mackay Shields.
When it happens, Venezuela's debt restructuring is likely to be one for the history books. But until the fall-out of Sunday's elections, it will be hard to even draft the first page.
“It has one of the biggest oil reserves in the world with very old infrastructure, and there are plenty of large oil multinationals nearby that can help it rebuild," said Mikhail Volodchenko, EM fixed income PM at AXA Investment Managers. "It could be a miracle story, but one step at a time.
"We need to get beyond this weekend.”