Recent events in Venezuela

Actualidad - 22/11/2017

After the announcements made by the Venezuelan authorities on 2017 November 3rd pertaining to their intention to restructure/refinance their debt, most bond prices dropped sharply. In an ambiguous way they also reiterated their intention to keep servicing their debt while they pursue discussions with creditors. (English version)

The current period was already considered as a critical one given the two substantial maturities due on national oil company PDVSA bonds for close to USD 2bn.

Our expectation was that they would be making these payments. What was unexpected was such an announcement after making the first of these two significant payments. 

They did pay a redemption of more than USD 800m on 2017 October 27th and finally paid with some delay another USD 1.1bn redemption due 2017 November 2nd.

Aside from these principal payments some coupons on PDVSA and sovereign bonds (about  USD 280m in total) were due to be paid before the end of their grace period on Monday 2017 Nov 12th. 

Apparently these have not been paid yet causing some of the rating agencies to declare PDVSA and the sovereign in default. It remains to be seen if these will also be paid with some delay as the authorities have, rightly or wrongly, invoked delays in the payment chain due to US sanctions. A recent official statement mentioned that these payments had been instructed. 

Following confirmations of some payments being received and amid reiterations of the government willingness to pay, most Venezuelan bonds have rebounded from the mid 20’s closer to 30.

The market has been pricing with quasi certainty an imminent default, that is why we would not expect a lot more downside from the levels reached last week should a default be confirmed.  

In the meantime, a much awaited creditor meeting took place in Caracas on Monday 2017 Nov 12th at the invitation of the government. Marked by low foreign attendance, it turned out to be more of a one way discourse than an exchange. Most of the points made earlier were reiterated, namely the financing difficulties due to US sanctions, the willingness to keep servicing the debt and to negotiate a restructuring/refinancing. Concretely there were no details about the how and when to pursue this exercise, so the next steps still remain a question mark. Which leads us to think that the operation was as much a communication exercise turned toward local audiences as a genuine intent to open the dialogue with creditors. As a matter of fact, government communiques were quick to report that the country had successfully begun the process of refinancing its foreign debt…

Local Political Context

It is important to frame these events within the latest local political developments. Against all odds, (popular support for the regime is less than 20%) the government declared a victory in elections for regional governors a few weeks ago without any massive fraud reported. Apart from a voting system biased in favor of the regime this victory seems mainly attributable to a demobilization of opposition voters after months of demonstrations and many victims which didn’t bring any change. With some political momentum in their hands, Maduro and his close circle might choose to bring forward the 2018 presidential elections and hence try to show that they are addressing the debt payment constraints versus the population needs.

Our Strategy

As we have communicated in the past, a restructuring of Venezuela's external debt was a potential scenario, with or without a prior default, and we were ready to go through that process should it materialize. Obviously US sanctions did bring forward  this possible outcome despite higher oil prices this year.

The latest events do not change our long term positive view regarding the potential recovery value of bonds. Given the debt stock, the resources of the country and the very likely policy or regime changes at some stage. 

Each sovereign restructuring is unique in its kind and recent examples include Argentina or Ukraine which we have managed in our funds. The case of Venezuela is so special in the sense that it is a unique example of a country so dependent  on a single source of income through oil and as such much more exposed to creditors’ actions than in any past cases. This is also what has explained their strong willingness to pay up to this day and their motivation to negotiate with their various creditors.


More generally in the market, the move already initiated many months ago, whereby some of the more traditional emerging markets investors have been exiting their Venezuelan bond positions, accelerated over the past weeks. Progressively a new category of investors, including specialized and distressed debt funds with a longer term outlook are getting involved. In our opinion, this rotation of the debt stock is an important factor which will impact valuations and volatility over the coming months as had been the case with Argentina from 2013 to 2016.

2017 November 16th. This document is issued by Edmond de Rothschild Asset Management (France).
This document is non-binding and its content is exclusively for information purpose. Any reproduction, disclosure or dissemination of this material in whole or in part without prior consent from the Edmond de Rothschild Group is strictly prohibited. The information provided in this document should not be considered as an offer, an inducement, or solicitation to deal, by anyone in any jurisdiction where it would be unlawful or where the person providing it is not qualified to do so.  It is not intended to constitute, and should not be construed as investment, legal, or tax advice, nor as a recommendation to buy, sell or continue to hold any investment. EdRAM shall incur no liability for any investment decisions based on this document.
This document has not been reviewed or approved by any regulator in any jurisdiction. The figures, comments, forward looking statements and elements provided in this document reflect the opinion of EdRAM on market trends based on economic data and information available as of today. They may no longer be relevant when investors read this document. In addition, EdRAM shall assume no liability for the quality or accuracy of information / economic data provided by third parties.
The information about the companies cannot be assimilated to an opinion of EdRAM on the expected evolution of the securities and on the foreseeable evolution of the price of the financial instruments they issue. This information cannot be interpreted as a recommendation to buy or sell such securities. The composition of the portfolio may change in the future.
Any investment involves specific risks. We recommend investors to ensure the suitability and/or appropriateness of any investment to its individual situation, using appropriate independent advice, where necessary. Furthermore, investors must read the key investor information document (KIID) and/or any other legal documentation requested by local regulation, that are provided before any subscription and available at under the “Fund Center” section, or upon request free of charge. Past performance and past volatility are not reliable indicators for future performance and future volatility. Performance may vary over time and be independently affected by, inter alia, changes in exchange rates.
« Edmond de Rothschild Asset Management » or « EdRAM » refers to the Asset Management division of the Edmond de Rothschild Group. In addition, it is the commercial name of the asset management entities of the Edmond de Rothschild Group.
47, rue du Faubourg Saint-Honoré
75401 Paris Cedex 08
Société anonyme governed by an executive board and a supervisory board with capital of 11.033.769 euros
AMF Registration number GP 04000015
332.652.536 R.C.S. Paris

Edmond de Rothschild Fund Emerging Bonds is a sub fund of the Luxembourg regulated SICAV which is approved by the CSSF and approved for marketing in France, Luxembourg, Spain, Austria, Switzerland, Germany, Finland, United-Kingdom, Italy, Netherland and Taiwan.
The subfund is classified in category 5 (A EUR & I EUR shares) in line with the nature of securities and geographical zones in the “objectives and investment policy” section of the key investor information document (KIID).
Risk of capital loss: The subfund is not guaranteed, nor does it offer capital protection. There is some risk that the capital initially invested in the subfund will not be fully recovered. Shareholders are hereby notified that the investment objective is provided for information purposes only. Under no circumstances can it be considered as a performance obligation for the asset management company.
Discretionary management : risk: Discretionary portfolio management is based on the anticipation of trends in different markets. There is some risk that the subfund may not be invested at all times in the most lucrative markets or financial  instruments.
Interest rate risk : Interest rate risk is the risk linked to a rise in yields on the bond markets, which causes bond prices to fall and thus leads to a decrease in the subfund’s net asset value. A rise in yields can adversely impact performance over an undefined period; similarly, in the event of negative interest rate sensitivity, a decrease in yields can adversely impact performance over an undefined period, causing the subfund’s net asset value to decline as a result. Interest rate risk may cause the subfund’s net asset value to decline.
Credit risk: In the event of a credit event (e.g. significant widening of the spread between a given issuer and a government bond with the same maturity), or the default or downgrading of a bond issuer (e.g. downgraded credit rating), the value of the debt securities in which the subfund is invested may decrease and, in turn, cause the subfund’s net asset value to decline. The use of High Yield bonds, within the limit of 100% of the subfund’s net assets, may increase the risk of a decrease in NAV, as these securities generate increased default risk. This fund should be considered as speculative and is specifically designed for investors aware of the inherent risks of investing in securities issued by companies with low or non-existent ratings.
Risks linked to investing in emerging markets: The subfund may be exposed to some securities incurring a higher degree of risk than that usually associated with investments on the main financial markets, due in large part to local political and/ or regulatory factors. The legal framework of some countries in which the underlying UCITS and investment subfunds might invest may not offer investors the same guarantees in terms of protection or information as those usually offered by the main financial markets. The securities issued on some emerging markets may be significantly less liquid and more volatile than those issued on more mature markets. In this respect, the liquidity of emerging country securities is more restricted than developed country securities; as a result, holding such securities may increase the portfolio’s level of risk. Market declines can be more sudden and more pronounced than in developed countries, potentially causing the subfund’s NAV to fall faster and more significantly.
Risk associated with financial contract commitments and counterparty risk: The subfund is exposed to risks inherent to derivative products. Risks inherent to the use of futures, options and swaps include, but are not limited to: downward and upward fluctuations in the prices of options, warrants, swaps and futures, due to changes in the prices of their underlying instruments; gaps between the prices of derivatives and the value of their underlying instruments; the occasionally limited liquidity of such instruments on the secondary market. Entering into derivative contracts on the OTC market exposes the subfund to potential counterparty risk. In the event the counterparty to a derivative defaults, the subfund is liable to incur a financial loss. Use of derivative products may therefore generate risks of specific losses for the subfund, which it would not have been exposed to if such strategies were not implemented. 
47, rue du Faubourg Saint-Honoré, 75401 Paris Cedex 08
Société anonyme governed by an executive board
and a supervisory board with capital of 11,033,769 euros
AMF Registration No. GP 04000015 - 332.652.536 R.C.S. Paris
16, Boulevard Emmanuel Servais, L – 2535 Luxembourg
47, rue du Faubourg Saint-Honoré, 75401 Paris Cedex 08