Venezuelan bonds resume trading!!!

Investors worldwide have suffered losses to their investment portfolios as they hold or have held bonds issued by the Republic of Venezuela or the state-owned oil company Petróleos de Venezuela, S.A. (PDVSA). Many bond investors here in Jamaica once owned or still own bonds issued by one or both entities, which are now in default.

For a bond to be in default, this means that the issuer is experiencing financial distress and is therefore unable to meet its payment obligations. The financial distress can affect their obligation to make interest payments, principal payments, or both. When faced with the possibility of defaulting, the issuer may attempt to restructure its debt by offering to exchange the current bonds for ones with more favorable terms that align with their current financial situation. This may include extending maturities &/or reducing interest rates among other things.

Previously the US government placed sanctions on the Venezuelan oil sector and PDVAS, imposing restrictions on trading of Venezuelan debt including bonds and other securities. However, with the recent news of the U.S. Treasury department amending two licenses and removing the ban on secondary market trading of some Venezuelan sovereign bonds and bonds issued by PDVSA, investors who hold these bonds have been eager to learn what impact this will have on their investments.

For current bond holders, the first thing to note is that this is a temporary lifting of sanctions for the next 6 months. The lifting of the sanctions came about because of an agreement reached between the current Venezuelan government and opposition parties for the 2024 election. The agreement will see the opening up of the electoral process to allow international observers and will also see the removal of prohibitions that have blocked top opponents from running for office. If these conditions are not met and kept, at the end of the 6-month period, the sanctions can be reinstated.

Shortly after the lifting of the sanctions and the reopening of secondary market trading, both Venezuelan sovereign bonds and PDVSA issued bonds have seen prices improve considerably. The price increases are primarily due to some investors anticipating that if all goes well and sanctions are lifted permanently, Venezuela may be able to restructure some or all the outstanding debt. If the restructure does occur, this would allow current investors to reverse some of their losses and new investors may be able to capitalize on the opportunity. However, this is still very speculative.

There has not been any announcement of a restructure or any move by the issuers to repay outstanding debts. The current lifting of the ban on secondary market trading is a move in the right direction for bond investors but it is still too early to determine how this will all play out. The important thing for investors to do is to continue to monitor the situation, know your current holdings and purchase price, monitor the current market prices and work with your licensed financial advisor to build a strategy for various possible scenarios.

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.