The Daily Update - Venezuela: The ‘Land of Grace’.. periods and recurring defaults

When Columbus first set eyes on what is now Venezuela from the Gulf of Paria he described it as ‘heaven on earth’ and gave it its enduring nickname of the ‘Land of Grace’. But 500 years on and the country’s debt problems are as deep, and its list of economic woes as long, as the Orinoco River. The only grace talked about is the grace period on its mountain of debt - and yesterday’s expiration of one on a coupon payment - putting the country once again in ‘default’ (although the International Swaps and Derivatives Association’s have yet to formally declare it).

Since and including the Latin American debt crisis in 1982, Venezuela has defaulted 6/7 times – thus averaging one default every 5 years or so. The last one, before the present, was in 2004 so actually the recent default-free stint of 13 years is above recent historical averages and has surprised many who have been waiting for former President Hugo Chávez and now President Nicolás Maduro to default on their sovereign debt and/or the debt of PDVSA the state-owned oil company. But the country has continued to trudge through the perennial penalties of disastrous economic and political mismanagement that culminated in the 80s, compounded now with falling oil production and oil prices half what they once were. It now looks like even such trudging is no longer sustainable.

The country has fallen just about as far as a country could, in terms of economic opportunity and investor hopes, since the golden economic boom from when the country had the highest GDP per capita in Latin America in 1935 and up to the ‘80s when it was the darling emerging market opportunity and optimistically Aaa rated by Moody’s from 1976 to 1983 (although Moody’s don’t disclose ratings prior to ‘87 for the country on Bloomberg these are easily accessible in historical papers). Then two decades of economic shocks, political crises, deadly riots and attempted coups crippled the country and investors’ dreams. It now stands rated effectively for default across all major rating agencies, not just reflecting the failed payment but with the expectations that Venezuela will likely also be unable to pay going forward - including 5 large principals maturing in the next couple of years (>$4.85bn due before 2020, around half of which is due in the next ~12 months).

And yet Venezuela’s Maracaibo Basin still has over 315 billion barrels of oil reserves according to some estimates which is almost 4x that of Russia or 40x that of Mexico. This makes Venezuela the world's largest known holder of proven oil reserves and continues to be one of the world's leading exporters. But adding to its woes, production on a country level has fallen sharply in the past couple of years from a multi-year average of 2.35mbpd (2012-2015) to just 1.95mbpd, along with the halving of oil prices since the beginning of 2015. This sharp drop in oil revenue, along with longstanding internal political impasse, hyperinflation and international sanctions - hindering any possible chance of restructuring and refinancing their debt - have all finally and predictably come to a head. Moreover, the EU has just approved economic sanctions and an arms embargo on Venezuela following the US Treasury Department’s further sanctions for the country last week… Still we’re not quite at the stage of Britain, Germany and Italy imposing a naval blockade as in the Venezuelan Crisis of 1902 and President Cipriano Castro’s refusal to fulfil foreign debts.

It’s taken over 16 years for Argentina to begin working-off the pains and complications of its 2001 default and their situation then was arguably better and simpler than that of Venezuela’s. And with many major debt deals with China having seniority over other Venezuelan bondholders they should expect even larger losses: that is possibly after waiting a decade or two to recover anything.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.