Bloomberg — Venezuela’s state oil driller stopped paying creditors almost six years ago. Its exports are restricted by the US. And Washington refuses to recognize the government that controls the company.
Yet, investors that scooped up one of the company’s bonds appear to be headed for a massive payout. The Petroleos de Venezuela SA notes due in 2020 have soared about 160% in the last year to around 50 cents on the dollar.
The reason: When it sold the debt, Venezuela’s government offered a 50.1% stake in the parent company of its US-based refiner Citgo Petroleum Corp. as collateral. Now, after a prolonged legal battle, a US judge has set a date to begin the process to auction off Citgo’s holding company. And holders of the bonds are atop the list of creditors set to be paid.
It’s a potential victory for big investors like London-based Ashmore Group Plc and a rare bright spot in the market for Venezuela debt after President Nicolas Maduro stopped payment on government and PDVSA bonds amid one of the world’s worst economic crises and crumbling relations with Washington.
The US doesn’t formally recognize Maduro and the country remains under sanctions that prohibit US firms from buying Venezuelan debt. That uncertainty helps explain why other PDVSA bonds trade for as little as 6 cents on the dollar.
However, there are growing signs of a thaw in relations between the Biden administration and Caracas, with the sides holding talks to explore temporarily lifting sanctions to encourage Venezuela to hold competitive presidential elections next year.
Lee Robinson, chief investment officer of the Altana Credit Opportunities Fund, which bought the notes after launching the fund in 2020, estimates prices of the bond would jump above 80 cents on the dollar if US holders could buy it.
The Weight of US Sanctions on Venezuela
“It’s the US sanctions that have driven the price down,” he said.
Francesco Marani, the head of trading at Madrid-based boutique investment firm Auriga Global Investors, agrees that an easing of sanctions would unleash a further rally. Auriga started buying the PDVSA 2020 bonds four years ago.
Not long after, as major Wall Street banks began dumping the debt, the prices fell to a low of around 10 cents on the dollar. Marani said that if the legal case proceeds as expected, the bonds will be paid out around par.
“The market is distorted by the trading ban,” he said. “The bond will continue to gradually trade higher.”
The bond fell into default in late 2019, less than a year before it matured. Bondholders are demanding about $1.9 billion in principal and interest due plus other fees, according to court documents.
Ashmore, which specializes in emerging-market investments, holds nearly 50% of the issuance, according to data compiled by Bloomberg. A representative from the company didn’t reply to questions seeking comment.
Creditors ranging from bondholders to a Canadian gold miner to oil company ConocoPhillips for years have been trying to force US courts to order an auction of Citgo’s holding company, PDV Holding. That sale has been largely held up because the Biden administration has protected the asset as part of its strategy to prop up Venezuela’s opposition.
But now the judge in the case, Leonard Stark, has set an Oct. 23 date to start the process that will ultimately end up with the auction of PDV Holding. The tentative sale hearing date is July 15, 2024.
When Will the Bonds Be Settled?
The market expects that the bond will get settled some time next year. Issued in 2016 as part of a debt exchange, the note is backed by shares in a subsidiary of PDV Holding that owns the group’s single asset: Citgo —a group of three refineries and a network of gas stations. So, even if creditors take over PDV Holding, they would still have an obligation to the bondholders.
With strong recent earnings reports from Citgo, the auction could fetch more than $13 billion, according to estimates from EMFI Securities, which has said the bond is undervalued even after its recent run-up.
“The PDVSA 20 bond will most likely get par or close to par,” said EMFI’s senior strategist Guillermo Guerrero. “This can happen either because they eventually take over the collateral or because they get paid off by whomever buys PDV Holding.”
The Venezuelan opposition — which is recognized by the US and therefore controls Citgo — is attempting to challenge the validity of the bond in New York state’s top court. That process, which is still unfolding, is adding to constraints on the bond’s price, said Jaimin Patel, senior credit analyst at Bloomberg Intelligence.
“If those uncertainties ease, then further price increases are certainly feasible,” he said.
--With assistance from Maria Elena Vizcaino.
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