As many Venezuela bondholders stampede, some joust for advantage

By Dion Rabouin, Maiya Keidan and Corina Pons

Reuters - Venezuela's efforts to restructure its debt may have triggered an initial stampede for the exits, but some investment funds are maintaining their portfolios or even beefing them up, betting that other investors' distress could spell opportunity.

President Nicolas Maduro spooked bondholders this month when he announced plans to restructure some $60 billion in bonds as his socialist government struggles with an economic crisis brought on by years of mismanagement.

Yet Maduro also said the country would keep servicing its obligations for now. That has given a modicum of comfort to investors wagering on Venezuela's junk bonds, some of whom are content to reap the massive yields they offer.

 

Others are actively positioning for large windfall profit similar to what a group of Argentine creditors reaped last year after more than a decade of litigation with Argentina's government.

Senior Venezuelan officials gave no clarification on the government's strategy in a short and confused meeting with creditors in the Venezuelan capital last week.

In the meantime, creditors have been organizing conference calls, holding improvised meetings in Caracas hotels and discussing the creation of groups that could represent bondholders in the event of a default.

"There are a lot of different conversations, a lot of lawyers, financial advisers who are trying to solicit that dialogue," said Diego Ferro, co-chief investment officer at Greylock Capital, which focuses on high-yield and distressed assets.

Ferro said that for the past few weeks, he has been buying both bonds issued by Venezuela's government as well as those sold by its state-owned oil company PDVSA, with a preference for the country's 2027 bond.

Both the 2027 bond and all of those issued by PDVSA share a common characteristic: They lack a clause that can force all bondholders to accept a restructuring pact as long as 75 percent sign off on the deal.

The absence of such collective action clauses, or CACS, can allow a small group of investors to hold out for better terms, as famously happened after Argentina defaulted in 2001.

Venezuela's Information Ministry did not respond to a request for comment.

ECHOES OF ARGENTINA

Distressed fund managers including Elliott Management and Aurelius Capital Management reaped billions of dollars last year when they negotiated a settlement with Argentina's newly elected government, which was anxious to end more than a decade of legal battles with bondholders.

"We're basically thinking of eventually going into a restructuring not too dissimilar from what Argentina went through in 2001-2005," said Nicolas Galperin, founder of Onslow Capital Management.

Galperin said his firm is looking to buy the bonds for around 20 cents on the dollar and earn pass-through interest with the hope of eventually selling them at a profit through a future restructuring.

He said he envisioned it as a two to three-year trade and was employing the strategy on both PDVSA and Venezuela bonds.

But an Argentina-like solution is effectively impossible in the short term.

Sanctions imposed on Venezuela this year by the government of U.S. President Donald Trump, in response to accusations that Maduro is creating a dictatorship, block U.S. banks from acquiring newly issued Venezuelan debt.

Investors would be unable to negotiate a settlement like the one bondholders reached with Argentina because they cannot exchange the bonds they hold for new debt.

Sanctions against specific Venezuelan officials bar investors from even sitting at the table with Vice President Tareck El Aissami and Economy Minister Simon Zerpa, two prominent members of Venezuela's debt negotiation commission.

That means long-term investments are clouded by the possibility that sanctions could impede a successful debt restructuring for years, particularly if the opposition continues struggling to make any headway at removing Maduro.

Even though Maduro is widely unpopular, the opposition remains divided and in disarray, with its most prominent leaders jailed, exiled or barred from holding public office. Presidential elections are expected next year.

Nonetheless, investors continue to be attracted to lucrative short-term returns.

A holder of Venezuela's most-traded bond, the 2027 maturity VENGLB27=RR, would get a 34 annual percent return from interest payments alone.

That is 15 times what the same investor would collect on a 10-year U.S. Treasury note.

Investors for now appear more interested in collecting those outsized returns than initiating an Argentina-style battle - though many believe Venezuela will eventually halt payments and creditors will sue to pressure the government into a settlement.

Bondholders walked away from last week's meeting in Caracas with a clear message from Vice President El Aissami: Venezuela "has hired the best lawyers."

Venezuela has appointed lawyer David Syed to advise it, working alongside a team at global law firm Dentons, according to IFR, a Thomson Reuters news service.

Many saw El Aissami's words as a warning that, despite the increasingly complex financial gymnastics, Caracas is preparing for a battle, and that creditors should do so as well.

(Additional reporting by Brian Ellsworth, writing by Christian Plumb; Editing by Cynthia Osterman)