Ahead Of Widely Condemned Vote, Hedge Funds Making Risky Bet On Venezuelan Bonds

Ahead of a controversial national vote on Sunday that has sparked severe unrest in that country, some hedge funds are taking big bets on Venezuelan debt.

Despite the threat of more sanctions by the U.S. and other nations, particularly against Venezuela’s state-owned oil company known as Petroleos de Venezuela, S.A., or PDVSA and widespread condemnation, the vote is for a special constitutional assembly that could rewrite the constitution.

The PDVSA bond that has a $1.8 billion principal payment due in November is concerned with one particular trade. From 83 cents just one month ago as the threat of sanctions weighs on it, this bond traded Friday at 76.5 cents, deeply distressed.

President Nicolas Maduro has reached a deal with Venezuela’s government opposition that would stop the vote this Sunday, is the strong rumor that is making the rounds. they will get a windfall on their holding of this PDVSA bond, if the rumors are true, hedge-fund traders are betting.

Reflecting the market’s view that the oil company would be able to make the November payment, the bond could rise dramatically on Monday if Sunday’s vote is called off. And recovery of 100 cents, a 30.7 percent return, could be made for those who bought the bond on Friday at 76.5 cents and held it to November, if the principal payment is made.

But a likely default of the PDVSA bond by the Venezuelan government and more sanctions from the United States, and possibly the EU, would be the possible result if the rumors aren’t true, and Sunday’s vote is held.

In that case, based on the varied opinions of funds and restructuring experts, the recovery value on the bond in a restructuring is somewhere between 30 and 60 cents.

According to the speculation circulating in the emerging-market trading community, the following an be the outlines of a deal.

Maduro agrees to hold a presidential election in late 2018 and long-delayed regional elections in December and not to hold the vote on Sunday. The opening of a humanitarian aid channel would also be allowed by the government. Because the government denies there is a crisis in the country, thus far that has been prohibited.

The opposition allows safe passage out of the country for Maduro and stops the unrest on the streets in exchange for that. But whether the opposition is united on this and will actually go along with it is unclear.

The current parliament is controlled by Maduro’s opposition and Sunday’s vote for the new assembly would supersede the current parliament. And leaders throughout the Americas have criticized that to being anti-democratic. With nearly 100 deaths so far, violent protests have rocked Venezuela.

Earlier this week, promising more if Maduro goes through with the vote, the United States imposed sanctions on 13 former and current Venezuelan officials.

a tax so heavy it wouldn’t make sense to buy Venezuelan oil or a ban on the import of Venezuelan oil is one of the most severe sanctions being floated. Oils sale provides the U.S. dollars Venezuela would need to pay the PDVSA bond due in November and it makes up 95 percent of Venezuela’s exports.

(Adapted from CNBC)


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