Venezuela's grand gathering with creditors Monday lasted all of 30 minutes and didn't produce anything of substance. To make matters worse, S&P Global Ratings declared the country in default while Fitch Ratings cited missed payments by the state oil company.
The actions from the ratings companies came after an odd spectacle in Caracas, where bond investors who made the trek to hear the country's restructuring proposal found a red-carpet welcome, an honor guard salute and gift bags stuffed with state-produced chocolate and coffee. Fewer than 100 creditors showed up at the downtown Caracas office building, and at least one hightailed it out after realizing that two government officials sanctioned by the U.S. were in attendance, fearful of violating rules governing interactions with them.
He didn't miss much. Nothing of import was announced and nothing of import was resolved, according to attendees who said they left just as confused about the government's intentions as they were going in. Vice President Tareck El Aissami was the only official to speak, and devoted most of his prepared 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 the nation would continue to honor its obligations and work with bondholders to find new ways to get them their money, but offered no concrete proposals for restructuring.
President Nicolas Maduro had summoned holders of some $60 billion of bonds issued by the government and state oil company Petroleos de Venezuela SA to begin a renegotiation as the nation's cash crunch worsens, sanctions make it difficult to transfer money and delayed payments pile up. Central bank reserves have fallen to a 15-year low and oil output has sunk to the lowest since 1989. Over the weekend, the grace period on $280 million in bond payments expired, and late Monday Fitch Ratings declared PDVSA in default and S&P did the same to the sovereign after each were late getting cash to bondholders.
“The debt restructuring process, which the company intends to undergo, will likely be prolonged due to the restrictive sanctions imposed by the U.S. government,” Fitch said in a statement. “PDVSA's liquidity position is expected to continue to weaken as a result of low oil prices and near-term debt service payments.”
The nation, home to the world's largest oil reserves, owed investors about $200 million and failed to make those payments by the end of a 30-day grace period, S&P said in a statement in which it lowered the country's rating to SD. Plagued with payment delays and running low on cash -- and with most of its debt trading near 30 cents on the dollar -- it's the first time in recent years the government has exceeded the buffer period on its bonds.
Investors in Venezuela's $5 billion of bonds maturing in 2019 and 2024 can organize to demand that the nation immediately pay back all they're owed, and down the line, holders of the nation's other debt, which have cross-default provisions, could choose to do the same.
It's possible investors won't take those actions, and instead put their hopes on getting a delayed payment. Otherwise, they risk setting off what could be the start of one of the messiest debt restructurings ever. S&P said there was a 50 percent chance Venezuela will default again within the next three months.
The event in Caracas, held across from the presidential palace at Palacio Blanco, was promoted as a critical conclave for foreign investors and came after official government Twitter accounts sent more than 100 messages urging bondholders to show up at the meeting. Most of the attendees were locals, and none were allowed to ask questions. Finance Minister Simon Zerpa, Oil Minister Eulogio del Pino, PDVSA President Nelson Martinez and planning vice president Ricardo Menendez were also in attendance.
It was never clear what the country could accomplish in terms of a restructuring. U.S. sanctions currently prohibit the type of bond swaps that would usually be part of any debt relief, and investors have shown a reluctance to engage with a government that's become an international pariah amid allegations of anti-democratic activities. The Treasury had advised U.S. investors to exercise extreme caution to avoid running afoul of sanctions.
But while Venezuela is the riskiest sovereign credit in the world, the country has also enriched fund managers over the past several decades under two successive socialist governments. It's shown an incredible willingness to pay its debt in tough times, with more than $2 billion transferred to PDVSA bondholders over just the the past month even as the country falls behind on more than half a billion dollars of interest payments.
El Aissami blamed an international financial blockage for making it difficult to get the money to investors, citing a move by Citigroup Inc. to close some of the country's accounts, Euroclear freezing PDVSA bond payments and Deutsche Bank AG's decision to discontinue its role as a correspondent bank this month. A Deutsche Bank official declined to comment. Spokesmen at Euroclear and Citigroup didn't respond to requests for comment.
In a speech before the UN Security Council on Monday, U.S. envoy Nikki Haley said Venezuela is “increasingly a violent narco-state that threatens the region, the hemisphere and the world.” Representatives from the South American country boycotted the meeting in Manhattan, as did Russia and China, two countries that have served as lenders of last resort.
On Tuesday, the International Swaps & Derivatives Association will reconvene to consider whether PDVSA's delayed debt payments will trigger default-insurance contracts.