Venezuelan Credit Dashboard: Default Risk Rises Even With Swap

(Bloomberg) -- Venezuela, which has the largest crude reserves on the planet, has defied predictions of default since the oil collapse started in 2014, and analysts are split as to how long the nation of 30 million can hold out. With that in mind, Bloomberg is taking a close look each month at some of the key components that may determine its fate.

Debt Payments

After weeks of tense negotiations, state oil company Petroleos de Venezuela said last week that creditors holding $2.8 billion of bonds that come due over the next year agreed to extend maturities. While short of the $5.3 billion that PDVSA had wanted to exchange, it will buy the company some time. After making a capital payment due on Nov. 2 on bonds that mature in 2017, the government and PDVSA will need to make payments totaling $722 million during the rest of the month, according to data compiled by Bloomberg. 

After that, payments are relatively light until next April, when nearly $3 billion comes due.

Next year is likely to be a “year of muddling through, with ad hoc measures including potential for more debt liability,” Siobhan Morden, the head of Latin American fixed-income strategy at Nomura Holdings Inc., said in a note on Nov. 1. “Next year becomes more challenging on whether FX reserves and more import compression continues to postpone a credit event with an increasing dependence upon oil exports as sole financing for USD liabilities.”

Bond Prices

Venezuela's dollar bonds plummeted in October as rising political tension and falling international reserves overshadowed the completion of PDVSA's swap offer.

The government's $4 billion of benchmark notes due 2027 declined 8.2 percent in October to 50.4 cents on the dollar as yields rose to 21 percent. The country's dollar bonds started rising on Tuesday, though, as news emerged that the government had released five political prisoners after Vatican-mediated talks with the government.

Credit-Default Swaps

Trading in credit-default swaps show that investors increased short-term default expectations in October, with the the implied probability that it happens over the next 12 months rising to 54 percent from 43 percent at the end of September. That's much less then the implied risk of 83 percent seen in February.

The probability of a default in the next five years rose to 91 percent from 87 percent a month ago, according to credit-default swaps.

Highlighting the risk of nonpayment, S&P Global Ratings on Oct. 25 downgraded PDVSA to “selective default” after saying it viewed the swap as a distressed exchange.

Central Bank Reserves

After six months of relative stability, Venezuela's international reserves plunged in October by more than a billion dollars to a new 14-year low of $10.9 billion. Reserves have fallen about $5.5 billion this year, according to data compiled by Bloomberg.

Currency Rates

Venezuela's weakest official exchange rate, used mostly for imports deemed non-essential, was mostly unchanged in October, ending the month at 658.3 bolivars per dollar. The complementary system, known as Simadi or DICOM, accounts for about 8 percent of the government's hard currency sales. The rest of Venezuela's greenbacks are sold at the priority rate of only 10 bolivars per dollar.

To read about trading in the illegal black market for currency, click here.

The Simadi bolivar has weakened a staggering 70 percent this year, and prices have been rising as a result.

Crude Prices

The price Venezuela receives for its oil exports rose about 10 percent in October to $42.51 a barrel even as West Texas Intermediate declined about 3 percent, suggesting a bit of good news as PDVSA president Eulogio Del Pino continued to lobby for OPEC production limits.

Del Pino was in China towards the end of October, and Maduro said he was getting ready to announce “very good news from China and Russia.

“He'll be informing of other complementary elements that will result in a total success of the plan to refinance our PDVSA,” Maduro said.

Venezuela's political situation has been as volatile as ever, with the opposition and government agreeing to a Vatican-mediated dialogue process that started on Sunday.

President Nicolas Maduro's administration is likely engaging in the Vatican-mediated talks to alleviate international pressure, divide the opposition and buy time, Eurasia Group, a political risk consultancy, said on Monday in an e-mailed report.

“Once it becomes clear that the government is not willing to genuinely entertain any of the opposition's demands, the focus will once again return to the streets as the only potential avenue to force change, so even if the opposition is somewhat divided right now, it will
likely unify around the street strategy once again,” Eurasia Group analysts Risa Grais-Targow and Agata Ciesielska wrote.

To contact the reporter on this story: Nathan Crooks in Caracas at ncrooks@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Daniel Cancel at dcancel@bloomberg.net, Sebastian Boyd