Venezuela running out of debt options amid turmoil: Neuberger Berman
Turmoil-striken Venezuela is running out of options to continue servicing bonds, according to Rob Drijkoningen, co-head of the Emerging Markets Debt (EMD) team at Neuberger Berman.
Drijkoningen said that the troubled South American country, while still included in the JPMorgan EMBI GD Index, is slowly getting worse.
As a result in Neuberger Berman’s country credit score for Venezuela, driven by both the macro and the ESG components, is now the lowest in company’s EMD bond universe of 84 EM countries.
“[It has] a 1.7% weight at present, through dollar-denominated government bonds and quasi-sovereign bonds from the state oil company PDVSA, [but] the country is not included in the EM corporate and EMD local indices,” said Drijkoningen.
“We have been maintaining an underweight view across our hard currency portfolios – as well as our blend portfolios – for more than a year now based on the deteriorating fundamental outlook. We also considered valuations to be at the high end of the range, especially after the rally last year and in light of the lack of ability to pay.
‘Running out of options’
“We believe the country is running out of options to continue servicing bonds.Oil output keeps shrinking due to lack of maintenance, decrepit infrastructure and arrears to oil service providers.
As Venezuela does not really produce much except oil, the country has been forced to collapse imports and eat into FX reserves – which have fallen to a 15-year low of US$10bn – to service debt.
Drijkoningen, pictured left, points out that there is a US$5bn bond coupon and principal due by the end of 2017 and US$13bn to the end of 2018.
“The regime has maintained its willingness to service this debt, but defaulted on pretty much everything else,” he said.
‘Some exposure warranted’
Neuberger Berman maintains an underweight bias to the country, but Drijkoningen believes that maintaining some exposure is warranted.
“There is still meaningful recovery value and a decent chance the opposition will take over within a reasonable timeframe, improving the chances for meaningful reforms,” he said. “In terms of exposure, we favour lower priced bonds from PDVSA, as this debt may fare better than other index bonds in a restructuring scenario.”