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Venezuela is overdue in a $7 billion bond, maybe on this one will pay


Venezuela is $7 billion overdue, but likely to pay this bond

- Principal, interest payment on 2020 bond is due on Oct. 27

- Notes are backed by Citgo, increasing stakes for Venezuela

By Patricia Laya

CARACAS
Petroleumworld 10 17 2018

Venezuela's next bond payment coming due may be one that it actually makes.

That would be an unusual occurrence for the beleaguered country, where the government and state oil company are behind on almost $7 billion owed to debt investors. What makes this one different, though, is that the $949 million payment coming due Oct. 27 is tied to a bond that's backed by a majority stake in Citgo Holdings Inc. That means that if holders get stiffed, they can lay claim to the crown jewel of Venezuela's U.S. assets.

Venezuela is desperate to keep that from happening, so investors seem to be betting that they'll get their money. The $2.5 billion of notes due in 2020 are trading at a record near 91 cents on the dollar, far higher than most Venezuelan bonds, which hover around 25 cents.

Venezuela's next bond payment coming due may be one that it actually makes.

That would be an unusual occurrence for the beleaguered country, where the government and state oil company are behind on almost $7 billion owed to debt investors. What makes this one different, though, is that the $949 million payment coming due Oct. 27 is tied to a bond that's backed by a majority stake in Citgo Holdings Inc. That means that if holders get stiffed, they can lay claim to the crown jewel of Venezuela's U.S. assets.

Venezuela is desperate to keep that from happening, so investors seem to be betting that they'll get their money. The $2.5 billion of notes due in 2020 are trading at a record near 91 cents on the dollar, far higher than most Venezuelan bonds, which hover around 25 cents.

Even if Venezuela makes the payment, the ultimate fate of Citgo is up in the air. Investors are in the middle of a race to lay claim to assets among increasingly restless creditors. A small Canadian mining company was awarded the right to collect on an arbitration ruling by taking shares of the owner of Citgo Petroleum Corp., a verdict Venezuela is appealing. Separately, an $8 billion bondholder group now advised by Guggenheim Securities has said it's “exploring options” to ensure that Venezuela's overseas assets are available to satisfy its claims.

JPMorgan Chase & Co. expects Petroleos de Venezuela SA, known as PDVSA, to make the bond payment because of the government's strong desire to hold onto Citgo.

“We would expect PDVSA to make every effort to pay,” analysts Javier Zorrilla, Ben Ramsey and Trang Nguyen wrote in a note dated Oct. 10. “PDVSA has demonstrated via its legal efforts a strong preference to maintain ownership of Citgo.”

In the meantime, there is no resolution in sight to Venezuela's economic malaise, and tensions in the socialist nation are brewing. Despite oil prices rising to a four-year high, output is now half what is was in early 2016. State employees have protested against a 3,000 percent increase to the minimum wage -- calling it inadequate amid hyperinflation. The U.S. is also stepping up sanctions against the regime and its allies, with President Nicolas Maduro's wife and several of his close associates receiving penalties last month.

That increased pressure gave a lift to bond prices in recent weeks, according to Siobhan Morden, the head of Latin American fixed-income strategy at Nomura.

Here's the latest breakdown of the securities in flux:
(*Within grace period)




— With assistance by Katia Porzecanski, Ben Bartenstein, and Jose Enrique Arrioja

_________________________

Story by Patricia Laya from Bloomberg News.

bloomberg.com 10 16 2018

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