RUSS DALLEN: Venezuela Snowballs into an Avalanche of Default



7 November 2017
Venezuela Snowballs into an Avalanche of Default

We are on the cusp of an official default ruling on Venezuela.  If the payment of $1.2 billion for the maturity of the PDVSA 8.5% of November 2, 2017, does not arrive in the next few hours, ISDA will be asked to rule if the CDS (Credit Default Swaps, a type of insurance contract) have been triggered.   Under the ISDA (International Swaps and Derivatives Association) rules, there is a three business day grace period for Failure to Pay.  What this means is that from the due date on the bond of November 2, PDVSA had 3 business days to make the payment before a credit event can be triggered.  That third day will expire tonight.  You can watch for the question to show up in the ISDA Determinations Committee here.

(By the way, as a result, CDS prices have skyrocketed, and clients who took our advice last week on Tuesday and Wednesday to buy CDS in our report have profited handsomely.  This is the first time we have ever made the recommendation to buy CDS on Venezuela, as they are expensive, but we were proven correct.)

In the meantime, an avalanche of downgrades are flooding in from the ratings agencies.  Even the Chinese ratings agencies!

China’s Dagong Places Venezuela’s Credit Rating on Negative List

Moody’s Cuts Venezuela’s CITGO to Caa1

Fitch Cuts Venezuela’s State Owned Electric Company CORPOELEC to ‘C’

S&P Cuts Venezuela’s CORPOELEC to CC

Moody’s Cuts PDVSA Ratings to Ca 

Venezuela Cut to ‘CC’ by S&P After Restructure Announcement

Venezuela Rating Cut to ‘C’ by Fitch 

Before moving on from the rating agencies, I wanted to point out that S&P — which I mentioned in last week’s report had cut Venezuela down to Selective Default in 2004-2005 when Venezuela had missed a payment on its Oil Obligation warrants — ruled Venezuela’s jamming of Bank of New York with $74 million in funds for the Oil Obligations at the last minute of October (which we had noted almost exclusively in our report last week) was a “noncredit extraordinary event.”

“Venezuela is also late and beyond its stated 15-day grace period for a coupon payment on its oil-indexed payment obligations. The coupon payment was due on October 15, and Venezuela’s payment agent publicly confirmed that it received the money on October 26. According to the payment agent, the deposit was not made in time, and the payment date was announced for November 20. In our opinion, based on our “Timeliness of Payments: Grace Periods, Guarantees, And Use of ‘D’ And ‘SD’ Ratings” criteria, the delay relates to a noncredit extraordinary event, and therefore we do not characterize it as a default.”

Finally, two more Venezuela coupons were supposed to be paid today:  $90 million on the $2 billion Venezuela 9% of May 7, 2023 and $93 million on the $2 billion Venezuela 9.25% of May 7, 2028.  No word from the Venezuela National Office of Public Credit, but I wouldn’t hold my breath.

That means that Venezuela has now not paid the coupons on 10 bonds for a total of $962 million in coupons all in their 30 day default period.  (That does not include the maturity ($1.12 billion) and coupon ($47.6 million) due on the PDVSA 8.5% of 2017 since Thursday).

Electricidad de Caracas becomes the first canary in the coal mine when its 30 day slop period to pay without causing an “event of default” ends on November 9.  On November 10, Venezuela will owe its monthly $29.5 million settlement payment to Gold Reserve.   On November 11, the first PDVSA payment tolls: the PDVSA 27 ($81 million).  The 11th is a Saturday, so Monday the 13th will be when it will officially go into default if not paid that day.   The Venezuela 19 ($97 million) and the Venezuela 24 ($103 million) will also expire their 30 day toll on November 12 (Sunday), thus also going into default if not paid on Monday the 13.

Monday the 13th is also the day bondholders have been invited down to Caracas to meet with OFAC sanctioned drug kingpin Tareck El Aissami and OFAC sanctioned Simon Zerpa.   You can find out about the meeting here (including the email address to RSVP and get information).

If you are going, you should know that the U.S. Treasury has seized over $500 million from accounts and properties belonging to El Aissami — and that is just in the U.S. alone.  It’s El Aissami’s birthday on Sunday, so don’t forget to bring a gift, though he hasn’t done badly for a 43 year old who has spent his whole working life in government.

Thanks for your continued readership and business.


Russ Dallen | Managing Partner

Caracas (58) (212) 335-1906
Miami (305) 735-8280
New York (917) 499-8346
London (44) (207) 993-4557


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