EMTA Special Seminar: Economic and Political Update for Venezuela (NYC) - April 12

Economic Decline of Venezuela Addressed at EMTA Seminar

Speakers at a special EMTA Seminar on the economic and political outlook for Venezuela re-emphasized the Maduro administration’s willingness to service its external debt, while discussing a seemingly-inevitable capacity to pay crisis. The event was held at EMTA’s New York City headquarters on Tuesday, April 12, 2016, and was sponsored by BancTrust. Additional support for the program was provided by JP Morgan and Scotiabank. Over 100 market participants attended.

Hernan Yellati (BancTrust) initiated the Seminar by requesting panelists’ assessments of the likelihood that Venezuela (and PDVSA) would service its debt in 2016. Robert Koenigsberger (Gramercy) commented that, while willingness to pay remains, capacity has become an issue over the last two years. “The sad reality is that they don’t have enough dollars for minimal imports,” and thus he expected a balance of payments crisis to occur. Koenigsberger argued that, even with oil at $50 a barrel, Venezuela would “still have a problem.” AB’s Marco Santamaria agreed, underscoring that “the direction is clear; Venezuela was already heading into trouble with oil at $100/barrel.”

Speakers speculated on the possibility of regime change. “Although President Maduro is unlikely to finish his term, he may well make it through this year,” commented JPMorgan’s Ben Ramsey. He did not expect the country’s legislative branch removing the president, “unless ‘bottoms-up’ social-tension mechanisms change the circumstances,” citing, among other factors, Maduro’s control of the Supreme Court. Ramsey noted that only if the president were removed in the first four years of his term would new elections be triggered; thus, there is an incentive to survive politically until at least January 10, 2017.

On the positive side, the opposition has adopted a long-term strategy using existing institutions, observed Ramsey. “It’s frustrating,” he acknowledged, while noting that two lessons learned in recent years were that elections were still respected in Venezuela, and that the Chavistas can no longer win elections.

Koeningsberger added that regime change could unleash “all sorts of multilateral financing” for Caracas. Santamaria noted that, while the MUD opposition has stressed its support of democracy and human rights, it hasn’t clarified its economic approach. He raised the possibility that, once in power, it might not adopt the orthodox economic policies normally consistent with an IMF program, although a MUD administration “might not have a choice.” Finally, Ramsey pointed out that, while most regime change scenarios could deliver a better policy mix, a military dictatorship could trigger international sanctions and could be a deterioration rather than an improvement.

Scotia’s Joe Kogan addressed recovery value in the case of a credit event. Kogan listed assets such as Citgo and Caribbean refineries totaling $5 billion, plus FX reserves that were likely to be depleted in the run-up to a default. (The panel later compared these assets to as much as $130 billion in total debt.) At current oil prices, Venezuela’s oil revenues fall $5 billion short of just the costs associated with keeping the oil industry producing oil plus minimal non-oil imports, he estimated. Kogan calculated that oil must be at least $46 /barrel to allow for debt service. He also estimated recovery value at only $20, while adding that the addition of oil warrants (which must be an improvement on the “small, illiquid, settlement–problem plagued VRRs” -- and which must have more strictly defined terms than Argentine GDP warrants) in a restructuring could push recovery value up to $50. Koeningsberger seconded the appeal of including warrants in a restructuring.

The treatment of Chinese loans was also a focus of the panel. Koeningsberger noted the topic was ripe for debate, comparing it on some level to the current imbroglio involving Ukrainian securitized debt owned by Russia. Ramsey argued that, “without a lot of transparency,” the Chinese likely took steps to protect their economic interests. In a practical sense, Beijing could argue that it is the country’s largest creditor and the only potential source of new money.

Panelists did not foresee a drawn-out Argentine-type legal drama, even with PDVSA bonds not including CACs. Koeningsberger expressed optimism that, “the right instruments can bridge the negotiating gaps.” After all, what could Argentina show as a benefit for 15 years of legal fighting with creditors, he questioned.

Santamaria ventured that one of the lessons learned from the Argentine restructuring could be that holdout creditors who got the first legal judgements received the highest recovery value. “Thus, in the case of a PDVSA default, it could be a race to the courts.” Koeningsberger countered that the uniqueness of the Argentine case was such that creditors of other sovereigns might receive less judicial sympathy.

A maturity extension of Venezuela’s outstanding external debt was unrealistic, in Kogan’s view, because the coupon would have to be set at onerously high levels. CACs and exit clauses would have to be used to force maximum participation in a restructuring. Santamaria noted the idea of exchanging short-term debt for a greater amount of longer-term debt, but acknowledged that this might not appeal to creditors without a greater assurance of payment in the future.

Yellati invited audience questions on a wide variety of additional topics, after revealing his own assessment. “There is a high likelihood that the Maduro administration will remain in power until 2019; we see strong willingness to pay, but recognize the lack of dollars is a concern,” in his view.