Venezuelan State Electric Company’s Trustee Declares Default (CDS Skyrockets To Over 16,000!)

The news the Venezuela is actually defaulting on its electric company bonds is hardly a surprise. Yet 1 year credit default swaps on Venezuela and their energy company PDVSA skyrocketed!

(Bloomberg) — Venezuela’s state electricity company was declared in default by Wilmington Trust, the trustee for the company’s bonds.

Electricidad de Caracas owed investors $27.6 million in interest payments on the notes due in April of next year. Its 30-day grace period expired on Thursday.

The $650 million of bonds had fallen to an all-time low of 23 cents on the dollar, showing that investors perceived them as the riskiest notes maturing during the next year in the world’s riskiest nation. While a default by the state oil company Petroleos de Venezuela, and possibly even the sovereign, could lead creditors to try to lay claim to the crude producer’s assets, Elecar, which PDVSA bought a decade ago, has nothing for overseas investors to seize.

“The Issuer’s failure to pay the overdue interest on the Notes on or before
November 9, 2017 constitutes an Event of Default under Section 5.1(ii) of the Indenture,” Wilmington Trust wrote in the letter to bondholders.

Some traders had long suspected that the bond could be a candidate for selective default because it contains no cross default clauses with PDVSA or sovereign notes. While bondholders may try to establish an “alter-ego” argument, that would most certainly be a lengthy legal battle.

The reaction in the CDS market?


Hey, at least Venezuelan oil prices are rising!



Debt Restructuring Scare Sends Venezuela’s 2 Year Yield To … 153%!

Venezuela’s President Nicolas Maduro sure looks snazzy in his colorful  attire (and medals), but he wins no medals for destroying their economy and market for their bonds.
(Bloomberg) — The specter of a Venezuelan debt restructuring is hitting some of the world’s largest money managers.
Their funds dropped Friday, when bonds sold off after President Nicolas Maduro announced plans to seek debt relief. Many had been heavily weighted in the oil-rich nation for years, meaning that while they enjoyed some of the best returns in emerging markets as the government kept up with its payments, they’re now vulnerable to any decline.
Ticker Name Tot Ret YTD Tot Ret 1Y Tot Ret 1D Geographic allocation
EMKIX US Ashmore EM Total Return Fund 10.62% 7.97% -1.79% Venezuela #6
PREMX US T. Rowe Price EM Bond Fund 8.53% 7.12% -1.17% Venezuela #6
GMCDX US GMO Emerging Country Debt Fund 11.68% 9.34% -1.08% Venezuela #4

* Based on data compiled by Bloomberg of funds with largest holdings of Venezuelan debt.

Jan Dehn, the head of research at Ashmore Group Plc, has no misgivings about his holdings. Although one of Ashmore’s funds posted its biggest daily decline since May 18, Dehn said that the selloff may well reverse. His willingness to stick with Brazil after that country’s bonds sold off six months ago amid corruption allegations against the president proved prescient as the notes rallied 7.3 percent since then, according to data compiled by Bloomberg.

“Volatility is inevitable, especially in a high-beta credit like Venezuela,” he said. “It creates trading opportunities. Right now, precisely during volatility episodes like these, the actions are being taken, which will ultimately differentiate good from bad managers.”


The Venezuelan yield curve (denominated in US Dollars) steepened today from 153% at the two year tenor to 45% at the 10 year tenor.


Here is Maduro gesturing what he is planning to do to bondholders.

Nicolas Maduro

Venezuela’s 10Y Sov Yield Jumps 905 BPS As Maduro Seeks Debt Relief (3Y Yield Hits 90%!)

Venezuelan President Nicolas Maduro announced his is going to seek debt relief. Not all that surprising given oil prices are about half of what they were in 2014 and oil output keeps tanking.


(Bloomberg) — On Thursday, at a raucous gathering of loyal supporters in Caracas, President Nicolas Maduro made official what the bond market had been anticipating for years: cash-strapped Venezuela is going to seek debt relief.
Blaming the financial sanctions imposed by the U.S. government — and its “lackeys” in the Venezuelan opposition who lobbied for such measures — Maduro said that a $1.1 billion principal payment on bonds from state-run oil company PDVSA that was due Thursday will be the last one made before the country begins negotiations with creditors.

“Venezuela has had to face a genuine financial blockade,” Maduro told the crowd in a fiery, speech broadcast on national television that lasted more than an hour.

Maduro seemed confused by the bond market’s terminology and, in turn, wound up leaving traders perplexed as to his exact intent. One second, he was calling for a “refinancing,” a word that implies a routine, market-friendly transaction, and the very next for a “restructuring,” a term more generally associated with coercive government action that imposes losses on creditors and is typically labeled a default. He didn’t say if the country will make other debt payments that are coming due in the next weeks.

Finance Ministry officials didn’t reply to messages seeking clarification last night.

The market has, in reality, been prepared for a call from Maduro to restructure the debt for a long time. Having watched the oil-rich country sink ever deeper into economic chaos under the socialist leader’s authoritarian rule, traders have driven down the average price of the government’s foreign bonds to just 36 cents on the dollar.

Still, the talks figure to be messy, and Friday morning’s market reaction reflected those jitters. Some government and PDVSA bonds sank as much as six cents on the dollar.  
Sanctions imposed in August by the U.S. have made it difficult to raise money from international investors, and effectively prohibit refinancing or restructuring existing debt by blocking U.S.-regulated institutions from buying new bonds. In addition to all the overseas notes, Venezuela owes billions of dollars in awards resulting from international arbitration disputes and to private companies with cash trapped in the country, while PDVSA and its subsidiaries have a slew of outstanding loans.

It’s an unprecedented situation for bondholders, who have limited recourse as long as sanctions are in effect.

That Maduro opted to fork over the $1.1 billion today — a huge sum of money in a nation that’s down to just $10 billion in hard-currency reserves — to make good on the Petroleos de Venezuela bonds indicates how wary officials are in Caracas of having the oil company get ensnared in the restructuring talks. It also triggered speculation among some investors that Maduro is planning on excluding PDVSA from the restructuring.

Through PDVSA, Venezuela — home to the world’s largest petroleum reserves — has offshore refineries and oil receivables. PDVSA’s U.S. refining arm, Citgo Holding Inc., has also been used as collateral to back some bonds. And if creditors start going after Venezuela’s oil assets, buyers of its crude are apt to turn to other sources, depressing not only demand but the price of Venezuela’s main treasure.

At least so far, Venezuela’s announcement isn’t having a knock-on effect on other emerging-market assets. Analysts said the country’s situation was unique, and not a sign of broader problems among developing nations.

The decision to seek a restructuring is a step that Maduro and his late predecessor, Hugo Chavez, rejected for two decades — defying pessimistic Wall Street analysts and making the nation’s debt one of the more profitable trades in emerging markets. Maduro now seems to be acknowledging that the heavy debt load for the oil exporting nation has become unsustainable amid a drop in crude output and prices, as well as the financial sanctions.
It’s “going to be ugly for holders,” said Ray Zucaro, the chief investment officer at Miami-based RVX Asset Management, which holds the PDVSA bonds that matured Thursday. “There’s no real way to sugar coat.”

While notes due in 2027 have plunged from about 50 cents on the dollar a year ago to 38.7 on Thursday, securities maturing next year have been trading at about 65 cents.

Even after the oil producer known as PDVSA made an $842 million principal payment Oct. 27, the nation is behind on about $800 million of interest payments. All told, there’s $143 billion in foreign debt owed by the government and state entities, with about $52 billion in bonds, according to Torino Capital.

Vice President Tareck El Aissami, one of the individuals targeted in the sanctions, was named head of bond restructuring efforts. Earlier this year, the Treasury Department alleged that El Aissami — who was elevated to his post in January — protected drug lords and oversaw a network exporting thousands of kilograms of cocaine. The acting Finance Minister Simon Zerpa, who is also the CFO of PDVSA, has also been sanctioned.

The U.S. has also accused the Maduro government of human-rights violations and undermining democracy, and President Donald Trump called the turmoil there — with more than 100 lives lost in street protests earlier this year — “a disgrace to humanity.”
Maduro made the announcement in a televised address in which he emphasized that Venezuela has always honored its obligations, and had the money to continue doing so, but was being hampered by the financial penalties the U.S. imposed.

Throughout the broadcast, Maduro kept Wall Street viewers on the edge of their seats by teasing an upcoming “historic announcement on debt,” then spending a half hour touting new ambulances and public roads as he waited for the international media to tune in.
His announcement left viewers confused as to why the government would opt to restructure after making two large bond payments, money that presumably could have been used to buy medications and other supplies in shortage. 

“It makes no sense,” said economist Asdrubal Oliveros, the director of the Caracas consultancy Ecoanalitica.

Thanks to Maduro’s gross mismanagement, Venezuela is suffering one of the worst economic collapses in modern Latin American history. Its economy contracted 10 percent last year while the IMF expects annual inflation to hit more than 2,000 percent next year. Socialist revolutionaries who came to power in 1999 vowing to raise up the poor and bring down the corrupt elite have driven the poverty rate to 82 percent and looted billions of dollars.International reserves have sunk to near a 15-year low.

Because Venezuela isn’t current with most of its key economic statistics, the most basic data an investor would use to gauge the country’s creditworthiness haven’t been made available. Still, credit default swap traders placed the implied probability of a Venezuelan default at 97 percent over the next five years.


Venezeula’s sovereign US Dollar-denominated curve with their 3 year sovereign yield almost reaching 90%.


“As part of the debt relief, I am symbolically giving up my colorful sash and medals and wearing a powder blue golf windbreaker.”


Venezuela, Argentina and Brazil: The Three Caballeros of Debt (Witching Hour For Maduro and PDVSA)

Any time a nation such as the US experiences a 10 basis point increase in the sovereign yields it is a big jump.

But today was saw 18+ BPS jumped in the Brazilian and Argentinian 10-year sovereign debt (denominated in US dollars). But a 178 BPS jump in the 10-year Venezuelan sovereign debt yield.


At the 2-year maturity, Argentina (non-dollar denominated) is up 72.2 BPS and Venezuela is up 516 BPS. Brazil is up 20.7 BPS.


Of course, Venezuela is up against a deadline for debt payments by their petro company  PDVSA. One payment is due tomorrow. Brazil is


At least Brazil has an upward sloping sovereign curve.


Yes, the Three Caballeros of debt.


Hunger Game: Venezuela’s Behind on Its Debt and Facing Two Huge Payments

(Bloomberg) Ever since the price of oil collapsed in mid-2014, there’s been a broad consensus among the bond-market crowd that Venezuela was going to default. Not immediately, they said, but at some point down the road.

Three years on, that time may have arrived. On Friday, the government-run oil giant PDVSA owes $985 million. Six days later, it’s on the hook for another $1.2 billion. Not only is that a daunting sum for a country whose foreign-currencyreserves recently dipped below $10 billion for the first time in 15 years, but it figures to be a logistical nightmare too.


Increasingly isolated by U.S. financial sanctions that have spooked banks and other intermediaries in the bond payment chain, Venezuela has alreadyfallen behind on interest payments worth $350 million that were due earlier this month. Those payments had a grace period — a buffer of sorts that gives the country an additional 30 days to work out the technical glitches and deliver the cash. The principal portions of the payments owed over the next two weeks contain no such language. Miss the due date and bondholders can cry default. Prices on the notes due Nov. 2 acutely reflect those risks: They’re at just 92 cents on the dollar.

“This is Venezuela — they’re very disorganized with these types of things,” said Alejandro Grisanti, the director of the Caracas-based research firm Ecoanalitica. “Every day, it’s harder for them to pay.”

The government had another $237 million in interest payments come due Saturday, and the National Public Credit Office has yet to announce their payment. A delay in those payments would bring the total in arrears to $587 million.

A default would be a painful end to what has proven one of the more profitable, and strange, trades in emerging markets over the past two decades. While the plunge in crude prices deepened an economic collapse and triggered ahumanitarian crisis unprecedented in the nation’s history, President Nicolas Maduro, like his predecessor and socialist mentor Hugo Chavez, has been determined to meet all foreign bond payments. He’s cut imports to free up hard currency for debt payments, tapped China and Russia for loans and mortgaged some of the country’s gold stash.

And because yields on the bonds have been so high, the returns have been eye-catching: over 9 percent per year on average over the past 20 years. This combination — outsize profits for Wall Street traders and shortages of food and medicine for Venezuelans back on the ground — has been so jarring that it even led to the coining of a new term for the nation’s debt: hunger bonds.


The fine print on these next two principal payments puts Venezuela in a tricky spot. If PDVSA were to deliver the funds even one day late, investors can rally together to demand the immediate payment of the rest of the money they’re owed. (Lacking the funds to pay back all the debt at once, Venezuela would likely look to enter into restructuring talks with creditors — a step that’s complicated by the sanctions.)

It isn’t clear, to be sure, that investors would want to immediately escalate the situation.

For one, getting 100 cents on the dollar a few days, or even weeks, late would be much less painful than enduring legal battles and restructuring negotiations that are likely to drag on for months, if not years. What’s more, analysts estimate that creditors could get as little as 30 cents on the dollar in the end. There’s broad reluctance to unnecessarily upset the gravy train, even if it’s showing signs of tipping over.

“It is better for bondholders to get cash, even late,” said Lutz Roehmeyer, who helps oversee about $14 billion at Landesbank Berlin Investment GmbH, the 13th-largest reported holder of PDVSA’s 2017 bonds. “Most of the bonds are with U.S. funds or local investors who won’t have an incentive to trigger a default.”

Investors in the credit-default swaps market, though, have a different set of incentives. They would seek to get ISDA, the ruling body in the swaps market, to declare a default, which would trigger payouts on the contracts.

Venezuela could still also make the payments on time. While $10 billion in foreign reserves isn’t much for a country that now owes some $140 billion to foreign creditors, it’s still enough to pay the bills for a while.

And the Maduro government has surprised the bond market before, making payments the past couple years that many traders had anticipated would be missed. Some of those now betting that these next two payments will also be made actually point to the $350 million currently overdue on the other notes as an encouraging sign. Those arrears indicate, they contend, that officials are prioritizing the payment of bonds with no grace period at the expense of those they can put off without penalty.

Even if Venezuela can make the payments due this year, investors say that, unless oil prices stage some sort of miraculous comeback, they still see default as an inevitable outcome. Credit-default swaps show they’re pricing in a 75 percent chance of a PDVSA default in the next 12 months and 99 percent in the next five years.

“When oil prices were high, they threw the best parties” and “put none of the money away in the bank,” said Ray Zucaro, the chief investment officer at Miami-based RVX Asset Management, which holds PDVSA securities. “So when the spigot turned off with oil prices, it left them in a bind because they had spent way too much, they had borrowed way too much.”

Yes, Venezuela partied when oil was $100, but the party ended when oil tanked to under $50.


And Venezuela’s oil company, PDVSA, now has a 1 yr CDS spread of just under $10,000.


What about Venezuela’s currency, the Bolivar? Here is the black market VEF/USD rate.


And since 1995, the OFFICIAL exchange rate with the US Dollar keeps on plunging.


Venezuela has a steeply inverted sovereign yield curve with their 3 year sovereign bond at over 60%.


Speaking of Hunger Games, here are ordinary Venezuelans scavenging for food on the streets of Caracas .


Spending Bubble? Federal Government Spends 3x Tax Receipts

While some are preoccupied (like me) with how the next Federal Reserve Chair is going return to monetary normality (and unwinded the $4.4 trillion balance sheet), others (like me) worry about the unsustainability of US Federal spending. Particulalry how much politicians have promised Americans in terms of entitlements.

Here is a chart showing Government total expenditures (red line) along with their source of taxes (personal in green and corporate in purple). The total Federal current tax receipts is in blue. As of Q2 2017, total expenditures exceed current tax receipts (personal and corporate) by 3 times (or 3x).

With M2 Money Velocity at a historic low, printing more money isn’t doing the trick.

And with unfunded liabilities (GAAP) at $108.7 TRILLION (around $900,000 per taxpayer), the Federal government has a spending problem.

Yes, mandatory (entitlements such as Social Security, Medicare and Medicaid) going hyperbolic, discretionary spending is being crowded out and is predicted to decline.

When we included the grossly underfunded public pensions, the big scarcity in the near future is where governments are going to come up with all the money thay have promised.

Yes, Congress is “over the line.” And has been for some time.

If Jeffrey Lebowski running Congress??