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PDVSA honors debt obligations amid political unrest, bonds rally

PDVSA notes rally after Venezuela makes good on $2.2 billion debt payment. Government says it will continue paying debt due this year.

Petroleumworld 04 13 2017

Bonds issued by Venezuela's state oil company rallied after the country made $2.2 billion in payments on notes that matured Wednesday.

The $1.1 billion of notes from Petroleos de Venezuela that come due in seven months gained 2.1 cents to 87.3 cents on the dollar as of 3:17 p.m. in New York. The payment, which was confirmed by Delaware Trust Company, strengthened investor confidence that the nation can avoid default for yet another year.

The debt from the state oil company maturing Wednesday had traded as low as 94 cents on the dollar last week amid doubts on whether Venezuela would make good on its obligations. The notes shot up to 97 cents on Friday after PDVSA said it had begun the payment process. Traders will be closely watching foreign reserve levels, which have dropped to a 15-year low under embattled President Nicolas Maduro, for clues as to the severity of the cash crunch that's limited Venezuela's ability to import food and medicine.

"If Maduro needed an excuse to declare a default, the current explosion in social unrest would have been the perfect one," said Francisco Rodriguez, the chief economist at Torino Capital in New York. "The fact that he didn't use it suggests that the government continues to be willing to go to very great lengths to honor its international commitments."

Venezuela's international reserves fell by $6 million on Monday to $10.626 billion, according to data from the Venezuelan Central Bank in Caracas. The limited drop-off makes it unlikely that PDVSA relied on the reserves to make the payment, according to Rodriguez.

"Venezuelan authorities continue to show a strong willingness to pay their external obligations and have the capacity to continue doing it for quite some time," he said. "These reserves now remain as a cushion."

To read about Venezuela's debt repayment schedule, click here.

After making the payments today, the country is set to get a few months of breathing room, with the next big test set for October and November, when a total of $3.5 billion comes due. Investors are still pessimistic over the long haul, with the odds of a credit event over the next 12 months years at 53 percent, according to credit-default swaps data compiled by Bloomberg. Those odds rise to 90 percent over the next 5 years.

PDVSA has yet to confirm Wednesday's payment but said in a Twitter post that its bonds were among “the most profitable assets in world markets.” The high yields the country bestows upon investors have become controversial in some political sectors after years of a severe economic contraction and widespread shortages of food and medicine.

Social Unrest

Tensions have been rising in Caracas and elsewhere in the country over the past several weeks, with the political opposition holding daily rallies to call for the removal of several Supreme Court judges after they moved to invalidate the National Assembly last month before partially overturning their decision days later.

With the opposition calling for the “mother of all marches” in Caracas on April 19, Maduro's government has played a heavy hand to suppress protesters by using tear gas and other means to keep opposition supporters from reaching central Caracas.

A total of 291 people have been arrested at protests across the country since April 4, the opposition alliance said Tuesday in a statement. Henri Falcon, the opposition governor of central Lara state, said in a Twitter post that two people were killed Tuesday night as protests erupted in the state's capital of Barquisimeto.

Recovery Value

Maduro, meanwhile, was heckled in southern Bolivar state on Tuesday evening after arriving from Cuba, and security forces had to protect him from objects being thrown from the crowd during a live broadcast of an open air drive down a city street. A video of the incident has since gone viral in social media posts across Venezuela.

As investors continue to speculate about the possibility of an eventual default, recovery values will be determined by the outlook for a change in government, Siobhan Morden, the head of Latin America fixed income strategy at Nomura Holdings Inc., said Tuesday in a note.

“We can no longer assume that economic stress alone would be the catalyst for regime change with over 20 months of intense phase of economic stress and the political cycles less vulnerable to economic cycles under an autocratic regime,” she wrote. “The catalyst for regime change is either the external shock that compromises the funding of the Maduro regime or perhaps the internal shock of widespread violence that forces intervention from the institutional faction of the military.”

Story by Ben Bartenstein and Nathan Crooks from Bloomberg.

bloomberg.com 04 12 2017

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