Prospect of change lifts Venezuela bonds to 2017 highs

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LONDON (Reuters) – Dollar bonds of Venezuela’s government and state-run oil company PDVSA hit their highest level since 2017 on Thursday, after U.S. backing for opposition leader Juan Guaido spurred investor hopes for a turnaround in the crisis-stricken country.

The corporate logo of the Venezuelan state-owned oil company PDVSA is seen at a gas station in Caracas, Venezuela September 24, 2018. REUTERS/Marco Bello

Guaido declared himself interim president on Wednesday, winning backing from Washington and parts of Latin America, and prompting socialist Nicolas Maduro, the country’s leader since 2013, to break relations with the United States.

The South American OPEC country has the largest crude oil reserves in the world and is a major supplier to U.S. refiners, but has been brought to its knees by mismanagement and hyperinflation forecast to reach 10 million percent this year.

Maduro’s government began gradually halting interest payments on some $50 billion in publicly traded debt in 2017 in an effort to save dollars for the collapsing economy.

The government and state-owned companies also owe more than $8 billion in unpaid interest and principal payments amid turmoil in the once-wealthy nation.

Many of Venezuela’s sovereign bonds have been trading at less than half their face value since late 2014 as investors have become resigned to the fact that much of the money originally lent to Caracas will not be paid back.

Those bond prices fell sharply again in the second half of 2017 when Maduro publicly called for a debt restructuring, with many left trading at a quarter of their face value.

“For the first time there is a feeling that there is pressure coming from both outside and inside the country,” said David Nietlispach at Pala Asset Management, whose firm holds both sovereign and PDVSA [PDVSA.UL] bonds.

“It is a massive step if the Americans do not recognize the government anymore… On top of that, it looks like we have a candidate who seems to be able to unify the opposition.”

The European Union added its weight to the push against Maduro early on Thursday, saying Venezuela’s authorities should respect the “civil rights, freedom and safety” of Guaido, but stopped short of following Washington and recognizing him over Maduro. At the same time, Turkey and Russia voiced their support for Maduro.

Nevertheless the momentum took Venezuela’s 2024 dollar bond VE045730476= up another 0.5 cents before steadying, having jumped more than 4 cents on Wednesday.

The PDVSA 2035 bond VE078589230= added 1.5 cents to hit its strongest level in nine months before it also ran out of steam ahead of U.S. and Latin American trading.

(Graphic: Venezuela bonds surge on regime change hopes – tmsnrt.rs/2Ti8p24)

JUMPING THE GUN?

Despite the surge in bonds of the last few days, few experienced Venezuela investors expect a resolution in the very near future. The issue for them is how much of the bonds any new government would pay back.

There will be much bigger issues to tackle first anyway such as ensuring the population has enough food and medicine again.

“There will be no debt restructuring for Venezuela until there is a regime change – that much seems clear,” said one sovereign debt restructuring expert, Cleary Gottlieb’s Lee Buchheit.

Once a change happened and a successor administration acceptable to the world – including the United States – was in place, the first priority would be to address the humanitarian situation and then reinvest in the run-down oil infrastructure, both of which required large sums of money, added Buchheit.

North Asset Management’s Peter Kisler, whose firm bought up more Venezuelan bonds around six months ago, said the best case scenario was that things start to move on that front in a year or so. It could be a lot longer though, and investors may not get all of their money back.

“Our general thinking is 30-40 cents is going to be the eventual recovery. The issue is that we are now getting there in some assets but it’s still not certain yet that he (Maduro) is going to go.”

Additional reporting by Marc Jones; Editing by Toby Chopra and Andrew Cawthorne

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