The Strategist

American financial institutions recognized Venezuela's default

11/17/2017 - 13:04

The government in Caracas and the state oil company PDVSA have not fulfilled their financial obligations to creditors, members of the International Association of Swaps and Derivatives announced.

Efecto Eco
Efecto Eco
The International Association of Swaps and Derivatives (ISDA) declared the Venezuelan government's default on public debt and bonds issued by the state oil company PDVSA. The decision was made unanimously on Thursday, November 16, by members of the Association's special committee, which includes 15 major financial companies, such as JPMorgan, Goldman Sachs and the US investment fund Elliott Management.

This means that holders of credit default swaps, that is, insurances from default, can receive compensation due to them. The committee will meet on Monday, November 20, to determine the terms of payment.

Previously, the rating agencies recorded a partial default on Venezuela's debt obligations. Since state-owned PdVSA failed to pay the next coupon on state-guaranteed securities, S&P lowered Venezuela's country rating to SD (partial default), and Fitch brought down the rating of PdVSA itself to RD (default on certain liabilities) in local and foreign currencies. Venezuelan agencies, both governmental structures and the opposition, are in talks with creditors on debt restructuring, but their prospects are not obvious. In part, they depend on China and Russia, which hold large parts of Venezuela's sovereign debt (in the amount of $ 150 billion).

Recall that the technical default on PdVSA obligations for a 30-day grace period was announced already in October. Since the obligations of the oil company are guaranteed by the Venezuelan government, the refusal to pay regular coupons of PdVSA bonds for about $ 300 million (bonds in US dollars with maturity in 2019 and 2024 years) was predictable. Prior to the downgrade, PdVSA had a Fitch rating for foreign currency liabilities C, in national currency CCC, Venezuela's foreign currency rating ay S&P was valued at CC level. Fitch lowered PdVSA's ratings in foreign and local currencies to RD, S&P downgraded Venezuela's country rating to SD.

So far, partial default on Venezuelan obligations concerns only a small part of Venezuela's external debt (including PdVSA debt), which is about $ 150 billion - up to 1% ($ 1.2-1.4 billion). The largest holder of obligations of Venezuela are the state structures of the PRC their share amounts to about $ 28 billion.

However, for most of Venezuela's commercial debt (according to independent estimates, 70% of holders of Venezuelan government securities are registered in the US and Canada) for more than $ 100 billion, the situation is still fundamentally uncertain.

The difficulties with debt restructuring are, first of all, relate to sanctions of the US Treasury imposed on PdVSA. The sanctions prohibit the acquisition of new obligations of the sub-issuer, which makes it almost impossible for the standard course of restructuring under sovereign default or voluntary restructuring of liabilities.