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!
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.”