Venezuela’s defaulted bonds gain luster on regime change hopes, says economist
Investors see fresh opportunities in Venezuela’s defaulted government bonds in a wager that recent unrest in the inflation-ravaged country could spark regime change and an eventual restructuring of its debts.
On Wednesday, the leader of the Venezuelan legislature, Juan Guaidó, declared himself the country’s legitimate leader, after President Nicolás Maduro was sworn in for a second six-year term a few weeks ago. The U.S. recognized Guaidó as the interim leader of the country, prompting Maduro to demand all U.S. diplomats leave Venezuela. On Thursday, Venezuela’s military threw its support behind Maduro.
“Yesterday’s events are likely to be followed by months of unrest, repression, and a much swifter escalation of economic sanctions by the U.S. Recent history suggests that such an environment tends to be supportive of bond prices as it fuels hopes of regime change,” said Carlos de Sousa, senior economist at Oxford Economics, in a Thursday note.
Such optimism has led investors to SNP up defaulted Venezuelan government paper. Oxford Economics said Venezuelan bonds have rallied nearly 40% year-to-date, with the average bond now trading at more than 30 cents on the dollar for the first time in seven months. That is around the average historical recovery value for a defaulted sovereign bond, according to Moody’s.
Even after the sharp rally, De Sousa said the rewards still outweighed the risks. In the event of a restructuring, he estimated investors could get paid out as much as 50% of the bond’s recovery value, or 50 cents on the dollar. If Maduro holds on to power, bond prices could fall to around 20 cents on the dollar, he said.
“The battle to oust Maduro is likely to be a protracted one but patience is likely to be rewarded, as the recovery value will certainly be much higher,” said de Sousa.
Bets on Maduro’s government to founder have underpinned a similar wager by Goldman GS, +0.46% when it bought billions of bonds issued by state-backed oil company Petróleos de Venezuela SA in 2017.
Yet that year also demonstrated how efforts to overthrow Maduro’s regime have failed before. After a wave of unrest in 2017, Maduro’s government dissolved the national legislature and the opposition’s momentum petered out.
But De Sousa say protests may have a higher chance of success this time around as the U.S. may freeze all assets of the Venezuelan government, “equivalent to a full-blown oil embargo, as PDVSA would not get paid for its oil exports to the U.S.”
Taking away the financial lifeline of the oil-dependent regime could spark a military rebellion. Moreover, as many observers and the general population now dismiss the legitimacy of Maduro’s election last year, it could add impetus to the drive for regime change.
“Maduro is not in power because of his endless charm. Rather, his power rests on his ability to pay for support,” said Jan Dehn, head of research at the Ashmore Group, a fund manager specializing in emerging markets, in a Monday note.