S&P Downgrades Venezuela To "Selective Default" After Bondholder Meeting Devolves Into Total Chaos
Tuesday, 14 November 2017 () Creditors had little expectations from today's ad hoc meeting with "soon-to-default" Venezuela, and with good reason: not only was the meeting attended by several sanctioned Venezuelan officials, potentially jeopardizing the legal status of any bondholders who voluntarily appeared at the Caracas meeting meant to "restructure and refinance" Venezuela's massive debt load, but it was nothing but total confusion, with neither Venezuela, nor creditors knowing what is on the agenda, why they were meeting, or what is the endgame. In sum, the meeting resulted in no firm proposals, lasted no more than 30 minutes, consisted largely of an angry rant by an alleged drug dealer who also happens to be Venezuela's vice president, and ended as chaotically as it started.
Quoted by Reuters, one bondholder had a perfectly succinct summary of what happened today, or rather didn't: “*There was no offer, no terms, no strategy, nothing,” *the creditor said, leaving the meeting that lasted a little over half an hour at the ‘White Palace’, *departing with a colorful gift-bag containing Venezuelan chocolates and coffee*.
Credit walked in as confused as they left, a little over a week after President Nicolas Maduro stunned investors with a vow to continue paying Venezuela’s crippling debt, while also seeking to restructure and refinance it; the two things are literally impossible at the same time. There is another problem: both a restructuring and a refinancing appears out of the question, due to U.S. sanctions against the crisis-stricken nation, which make discussions with the key negotiators who has been put on a sanctions black list, grounds for potential arrest. A default would compound Venezuela’s already disastrous economic crisis.
As Reuters reports, Monday’s short and confused meeting, attended by senior Venezuelan officials blacklisted by the United States, gave no clarity on how Maduro would carry out his plan, bondholders and their representatives who participated said afterwards.
That means Venezuela remains with the dilemma of whether to continuing paying debt at the expense of an increasingly hungry and sick population, or defaulting on creditors and burning its bridges to the global financial system.
Vice President Tareck El Aissami, the only government official to speak, devoted most of his remarks to railing against Donald Trump and global financiers who he said have conspired to keep the country from making debt payments on time. *He pledged Venezuela would continue to honor its obligations while working to form committees with bondholders to figure out the next steps. *He offered no specific proposals for restructuring, according to Bloomberg which was briefed by people who attended the meeting, which wasn’t open to journalists.
The surreal procession of Venezuela's descent into insolvency started earlier:
The event, held across from the presidential palace at Palacio Blanco, was accompanied by much fanfare, *with a literal red carpet laid out for attendees who passed through an honor guard on their way into the building*. After government Twitter accounts sent repeated invitations to the meeting over the past week, it appeared that *no more than 100 people showed up, and none of them were allowed to ask any questions publicly*. Finance Minister Simon Zerpa, Oil Minister Eulogio del Pino, PDVSA President Nelson Martinez and planning vice president Ricardo Menendez were in attendance.
The most notable presence, however, was that of chief debt negotiators Vice President Tareck El Aissami and Economy Minister Simon Zerpa - *whom the U.S. previously sanctioned for drug trafficking and corruption charges respectively *- who attended the meeting for half an hour. As Reuters recounts, "they met with some bondholders, while others stayed out of the room on concerns about penalties for dealing with officials sanctioned by Washington."
At that point the meeting turned even more bizarre:
*El Aissami told creditors that Deutsche Bank may soon cut off some financial services to Venezuela*, participants said. He read a statement protesting unfair treatment by global financial institutions, including U.S. President Donald Trump’s sanctions aimed at preventing Venezuela from issuing new debt.
In retrospect, the move was at least somewhat clever: “Now Maduro can say: ‘I showed goodwill, the bondholders showed goodwill ... but unfortunately because Uncle Sam is not playing ball we can’t (refinance)',” said Jan Dehn, Head of Research at Ashmore Investment Management, who did not attend the meeting. “I‘m not hugely surprised nothing’s come out of that meeting.”
Surprisingly, and ignoring the sheer chaos of recent events, markets remain optimistic that Venezuela will continue to service its debts despite Friday's notice of involuntary default by bond trustee Wilmginton Trust; bulls were noting that Caracas has made close to $2 billion in payments in the past two weeks, albeit delayed. Somehow they extrapolated that this state would continue indefinitely.
In any case, the market appears placated for now: bond prices were up across the board on Monday, with the benchmark 2022 notes issued by state oil firm PDVSA rising 3.3 percentage points. Meamwhile, nearly $300 million in late interest payments on three bonds - PDVSA 2027, Venezuela 2019 and Venezuela 2024 - was also due on Monday after 30-day grace periods ended. But bondholders appeared unconcerned at the delay, which was due in part to increased bank vigilance of Venezuela transactions.
“My expectation is that the coupon payments will come through as well,” said Ashomer's Dehn. “We know that these delays exist and why they exist.”
Meanwhile, for Maduro the choice is simple: keep paying creditors and preserve some minute, if irrelevant, access to capital markets, or conserve the cash and feed the starving domestic population. The sight of poor Venezuelans eating from garbage bags has become a symbol of Venezuela's socialist decay. It contrasts sharply with the era of Chavez, when high oil prices helped fuel state spending.
According to Reuters, halting debt service would free up an additional $1.6 billion in hard currency by the end of the year. Those resources could be used to improve supplies of staple goods as Maduro heads into a presidential election expected for 2018. But the strategy could backfire if met with aggressive lawsuits. A default by PDVSA, which issued about half of the country’s outstanding bonds, could ensnare the company’s foreign assets such as refineries in legal battles - potentially crimping export revenue.
Which is why when choosing between keeping its creditors happy or feeding its people, Maduro will always pick the former...
* * *
... Unless, of course, the decision is made for it: late on Monday evening, S&P announced it was lowering Venezuela's credit rating from CC to Selective Default, or SD. Highlights below:
*Venezuela Long-Term Foreign Currency Rating Lowered To 'SD'*
· Venezuela *failed to make $200 million in coupon payments for its global bonds due 2019 and 2024 within the 30-calendar-day grace period. *
· In line with our criteria for timeliness of payments, we are lowering the issue ratings on these bonds to 'D' from 'CC' and the long-term foreign currency sovereign credit rating on Venezuela to 'SD' from 'CC'.
· The local currency sovereign credit ratings on Venezuela remain on CreditWatch with negative implications, reflecting our view that the sovereign could again miss a payment on its outstanding debt obligations or advance a distressed debt exchange operation, equivalent to default, within the next three months.
On Nov. 13, 2017, S&P Global Ratings lowered its long- and short-term foreign currency sovereign credit ratings on the Bolivarian Republic of Venezuela to 'SD/D' from 'CC/C'. The long- and short-term local currency sovereign credit ratings remain at 'CCC-/C' and are still on CreditWatch with negative implications. At the same time, we lowered our issue ratings on Venezuela's global bonds due 2019 and 2024 to 'D' from 'CC'. Our issue ratings on the remainder of Venezuela's foreign currency senior unsecured debt remain at 'CC'. Finally, we affirmed our transfer and convertibility assessment on the sovereign at 'CC'.
*Our CreditWatch negative reflects our opinion that there is a one-in-two chance that Venezuela could default again within the next three months. *We could lower specific issue ratings to default ('D') if Venezuela doesn't make its overdue coupon payments before the stated grace period expires, or upon the execution of the announced debt restructuring.
If the sovereign cures its default on the overdue coupon payments and remains timely on other coupon payments before the restructuring debt operation is completed, we would raise our long-term foreign currency sovereign issuer credit and issue ratings to 'CC'.
If any potential restructuring operation is completed, we would lower all of our foreign currency ratings on Venezuela to default and subsequently raise them to the 'CCC' or 'B' category.
On Nov. 12, 30 calendar days had passed since two coupon payments were due, and Venezuela had not paid the $200 million due to bondholders (or the bondholders had not received funds by that date). In accordance with our criteria, "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," we have lowered two issue ratings to 'D' (default), and we lowered the long-term foreign currency sovereign credit rating to 'SD' (selective default).