Venezuela, State Oil Firm Default on Billions Worth of Bonds

Henrietta Brewer
November 17, 2017

A committee of the International Swaps and Derivatives Association ruled on Thursday that Venezuela and state-owned oil company PDVSA have formally defaulted on their bonds.

The pro-Maduro Supreme Court has ruled the government can now choose oil sector partners directly, outraging the opposition, which says the sector is riddled with corruption.

For PDVSA, the net value is around $250 million. The ratings agency this week declared the country itself in selective default after it failed to make $200 million in payments on two global bond issues.

The net value of CDS on Venezuela's sovereign bonds is about $1.3 billion. At the same time, the cost to protect against a default by PDVSA hit a record as traders speculated the overdue payment wouldn't be made in time to prevent the derivative contracts from triggering.

PDVSA also said it has made the interest payment on its 2027 bond and has "successfully completed" capital payments on the 2020 and 2017N bonds.

Details of how they will be settled will be decided at another meeting of the Determinations Committee scheduled for Monday afternoon.

An ISDA official explained that the next step to be discussed Monday is "whether to hold an auction to determine the settlement price that will then determine the payout in CDS", as well as the auction date.

It noted that payments will be "minimal" during the first six years.

All 15 members of ISDA's financial committee voted in favor of statements that "a failure to pay credit event had occurred with respect" to Venezuela and PDVSA. "It's a really unusual situation".

Venezuela on Wednesday signed a pact to restructure its debt with major creditor Russian Federation as the cash-strapped nation teeters on the edge of default.

Venezuelan officials blame payment delays on US sanctions, which have made banks warier of dealing with funds from Caracas, thus clogging transfers. PDVSA's 10-year bonds touched a record low of 23.3 cents on the dollar last week.

A drop in oil prices and mismanagement crushed the economy, leading to widespread shortages of food and other basics amid triple-digit inflation.

Many in the nation of 30 million are skipping meals, and increasingly suffering from malnutrition or preventable disease.

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