Venezuela's debt restructuring

President Nicolás Maduro announced on 2 November that Venezuela plans to "refinance" and "restructure" its external debt. The country's acutely dislocated economic condition and the lack of any credible plan for urgently needed economic reform severely limit the scope for any deal with bondholders. Restructuring will be hindered even further by US economic sanctions.

• Venezuela's options to meet debt-service payments are dwindling rapidly, increasing the risk of judicial actions against Venezuelan assets. Any credible debt restructuring proposal needs to be accompanied by clear plans for economic reform showing bondholders a viable scenario for improved debt sustainability. At present, there are no indicators that any such plan is being developed, or likely to be forthcoming in the foreseeable future.
• Lacking credible restructuring proposals, Venezuela faces growing pressure to default. In any case, there is also an acutely high risk that technical defaults have been or will soon be triggered by consistently late payments of principal and interest. Declaration of a debt moratorium and/or actual default will sharply exacerbate non-payment risks within Venezuela and increase the likelihood of legal action by creditors to seize Venezuelan assets located abroad, including bank accounts, oil cargos, and assets such as refineries. A meeting in Caracas on 13 November between bondholders and Venezuelan authorities failed to indicate how Venezuela could avoid default. This prompted Standard & Poor's Global Ratings to become the first credit rating agency to declare Venezuela already to be in technical default, following its late payment of two interest payments.
• Successful restructuring of debt unlikely with current government authorities. President Nicolás Maduro appointed a presidential commission to oversee the debt restructuring process, led by Vice-President Tareck El Aissami, who was sanctioned by the US Department of the Treasury's Office of Foreign Assets Control (OFAC) in February 2017 for alleged drug trafficking and money laundering. As a result, US bond holders would be subject to sanctions-related penalties for any dealings with El Aissami, significantly hindering negotiations. Economy Minister Simon Zerpa is also included on the OFAC list. In addition to these legal restrictions, IHS Markit assesses that the team designated by Maduro to manage the debt restructuring badly lacks expertise.
• US sanctions limit the possibility of debt restructuring. Legal constraints resulting from US sanctions prevent US-based banks from taking part in any restructuring process. On 24 August, US President Donald Trump signed an executive order imposing sanctions on the issuance of new debt and equity issued by Venezuela's government and its national oil company PDVSA. The sanctions do not target oil exports but prevent the government or PDVSA from restructuring its debt by creating any new debt instruments, with longer maturities or lower coupons, as is commonplace within a debt renegotiation. Issuance of new instruments under New York law - previously used by Venezuela and PDVSA - is clearly no longer available, but use of other jurisdictions will be heavily constrained by the need for international investors to avoid risking US penalties. Potential buyers of new bonds in any jurisdiction, including Venezuela itself, are very likely also to be deterred by the lack of a clear legal framework within Venezuela itself, after its highly challenged move to remove powers from the opposition-controlled National Assembly.
• Domestically, increased non-payment risks are likely to affect government and state-owned suppliers across all sectors and increase state contract alteration risks. International default is likely to trigger renegotiation of contracts and even expropriation of assets - particularly in cases where companies are forced to decrease production because of difficulties in accessing credit or due to supply chain disruptions. Ahead of a presidential election in 2018, Maduro is likely to exploit nationalist rhetoric and allege external threats to divert attention from Venezuela's hyperinflation and severe shortages of food and basic goods, including medicines. Crucially, Maduro potentially could allocate scarce foreign-currency resources freed up by failure to service sovereign and PDVSA debt to strengthen the state-owned system of distribution of subsided food to the population and attempt to expand imports of basic goods. Overall, Venezuela's exclusion from international financial markets will increase the country's reliance on Chinese and Russian state or state-driven funding (e.g. that provided by Rosneft).

Indicators of changing risk environment

• Imminent statements from the International Swaps and Derivatives Association confirming a credit event in PDVSA (or Venezuelan sovereign) credit default swaps (CDS), triggering a pay-out of CDS.
• Further delays to payments of interest or outright non-payment on outstanding issues by PDVSA, Venezuela, or other state-owned enterprises (SOEs).
• Statements by trustees to Venezuelan and PDVSA issues that payments have not been completed successfully within relevant grace periods, triggering technical default.
• Formation of bondholder action groups seeking to take legal action against Venezuela or PDVSA for non-payment, leading to potential efforts in New York courts to seize Venezuelan assets.
• Statements suggesting a debt moratorium or abrogation by Venezuela and its major SOEs of their international liabilities.
• New EU or US sanctions targeting the oil and gas sector directly, further undermining the scope to undertake successful debt restructuring.

Diego Moya-Ocampos is a Senior Risk Analyst within the Economics & Country Risk group at IHS Markit
Paula Diosquez-Rice is a Senior Economist specializing in Latin America & Caribbean for IHS Markit

Posted 14 November 2017 ​