With little available economic data and a government hostile to market-friendly initiatives, trading Venezuelan bonds has for years been a guessing game.
But at least investors had been guessing the answers to relatively clear-cut questions: will Venezuela default, and, if so, when?
Then, last Thursday, president Nicolás Maduro publicly accepted that the sovereign and PDVSA needed to restructure their debt. Game over, surely?
More questions than answers
So many aspects of last week’s announcement on Venezuelan bond payments is utterly unprecedented, rendering many lessons learned from previous restructurings of limited use.
When did an issuer last make $2bn of bond payments in the days before declaring its intention to restructure?
Who simultaneously announces both a restructuring and its intention to keep honouring its debts?
Has an issuer ever claimed to be a punctual debtor while routinely treating grace periods on coupon payments as the real deadlines, rather than an emergency measure for extraordinary circumstances?
And has any issuer ever appointed as head of its restructuring committee a person — in this case, vice president Tareck El Aissami — who most bondholders are legally barred from speaking to (because he is on the US Treasury’s drug kingpin list)?
In true chavista style, Venezuela’s communication has been entirely ambiguous — whether deliberate or not.
New theories in play
Hence the broad range of reactions. Several funds and analysts consider the announcement as good as a default, and bond prices have thus slumped.
EM investment giant Ashmore posits that this could be little more than Maduro putting out feelers for what is possible in negotiations and buying himself some time. The opposition-controlled national assembly, meanwhile, has accused Maduro of scaring the markets to push down the price of bonds so the government can carry out cut-price buybacks.
What really blindsided investors in Maduro’s announcement was not the potential default, which was already priced in, but the nature of the announcement. The two key factors to consider in an investment decision — ability to pay and willingness to pay — are now even harder to evaluate than before.
Venezuela apparently does have the ability to keep paying for a while yet, as many analysts had predicted, and says it intends to do so — suggesting willingness, too. Moreover, after PDVSA’s recent principal payments of nearly $2bn, neither the sovereign nor the oil company face principal payments until August 2018.
Bondholders now therefore have an even harder task in front of them, as they enter the realm of trying to understand the motivation of Maduro’s statement and the proposed initiation of restructuring negotiations.
Maduro may be genuine in his desire to carry out a restructuring in good faith, but surely he knows that this is nigh on impossible, given US sanctions that prevent US funds taking part in any kind of swap or new bond. And if this is his intention, why did he appoint the blacklisted El Aissami to lead negotiations?
If he is not genuine, an inconsistent president and two issuers with erratic communication are likely to leave few clues for investors to work out Venezuela’s mind games. They’d be better off guessing the filling of the empanadas that the president apparently keeps in his desk drawer.
All this, of course, assumes that Maduro actually had a plan in mind as he spoke. One would have thought he would have been more careful about freely interchanging the words “restructuring” and “refinancing” if he had indeed thought carefully about how his announcement would be taken.
Maybe Maduro himself doesn’t even know what comes next — meaning there's no way bondholders can expect a sharper picture than they did before last week’s announcement.
It didn't seem possible that a situation this murky could be made less simple. Somehow, Maduro managed it.