Venezuela: Thinking of Cromwell and Crude

Venezuela: Thinking of Cromwell and Crude

Hedge funds, among them some of those the unsympathetic call “vultures,” bought into the bonds of the Petróleo de Venezuela SA (PDVSA) early this year. PDVSA is Venezuela’s state-owned oil company, the consequence of nationalization forty years ago. Its fate turns on (a) the vagaries of post-Chavez politics in that country, and (b) the state of the globe’s market for crude.

Many a charismatic dictator in the world’s history kept power to and for himself through an intricate personal balancing act, only to succumb to mortality and to have his regime succumb because he has left behind a successor who proved unable to perform the acrobatics at the same level. That describes the fate of the English Commonwealth after Oliver Cromwell’s death and the hapless performance of his son. That also, I submit, describes the fate of the self-consciously revolutionary regime in Venezuela since the death o+f Hugo Chavez in 2013 and amidst the improvisations of his successor, Nicholas Maduro.

Last month, hundreds of thousands of Venezuelans took part in protests in the capital city, Caracas, aimed at getting early elections, and bringing about Maduro’s retirement. Jeering Venezuelans banging pots and pans in a deafening racket not only interrupted one recent Maduro appearance, they ended up chasing him away from the scene.

Bond Swap Terms

A few days later, on Monday, September 26, the PDVSA sweetened the terms of a bond swap proposal. It has been trying to swap 2020 bonds for 2017 bonds. The fewer bonds actually mature next year, the better PDVSA’s cash flow situation in the coming months. But will the political and economic environment in Venezuela change sufficiently over the next couple of years that the swapped-for bonds will be worthwhile in 2020? Or, at least, will the market be fooled for some period between now and then into thinking that they’ll be worthwhile when they come due, long enough a period to allow bond holders a graceful exit in the secondary market?

There was adequate sentiment for “yes” answers to send the value of these bonds to a two-year high after announcement of the swap proposal.

As Fitch has said, though, “PDVSA’s credit quality is inextricably linked to that of the Venezuelan government. Venezuela’s ratings (IDR ‘CCC’) reflect the sovereign’s weakened external reserves, high commodity dependence, rising macroeconomic distortions, limited reduced transparency in official data, and continued policy and political uncertainty.”

The credit worthiness of both the company and the country depend in turn on the price of oil. A sustained rise would allow the markets to forgive a lot of sin.  There have been some efforts to shore up the price of crude on the global scale –on Thursday, September 29, the Organization of Petroleum Exporting Countries announced preliminary plans to cut output. OPEC countries are now producing approximately 33.6 million barrels per day. The target is to cut that to 33, and perhaps as low as to 32.5, million bpd.

Not a Done Deal

The cut is far from a done deal yet. The tricky part for any output country is deciding how to apportion to proposed production level among the member countries. That won’t happen, if at all, until the November OPEC meeting. Still, there is hope among sellers and concern among buyers that this one might stick. The hopes and fears alone will suffice to help stabilize prices between now and November.

According to Iran’s official news agency, that country’s president, Hassan Rouhani, spoke to Venezuela’s Madura over the week end by telephone and assured him that Iran is committed to supporting prices. That call was at least symbolically important because Iran was only recently barred from most of the global market by international sanctions. In the post-sanctions world, it is natural to expect that Iran would want to make up for lost time by ramping its own production to … as much as feasible. The point of the call was for Rouhani to re-assure Madura that Iran wasn’t going to succumb to that temptation.

But really, stabilizing the price, stopping the long decline, won’t be enough. What would help Venezuela would be a sustained move in the opposite direction. And betting on that, at this point, is a very speculative bet indeed.

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