30 June 2015

Venezuela Bonds Trapped by Oil’s New Normal as Relief Rally Ends

By Nathan Gill
(Bloomberg) -- This year’s climb in crude prices, however slight, brought relief to Venezuelan and Ecuadorean bondholders after last year’s crash decimated the oil producers’ revenue and prompted concern they were running short of cash.

Now, the pessimism is back.

While New York oil futures have surged 36 percent from a six-year low in March, they’re still down 45 percent from their 2014 high and probably will stay around there for the rest of the year, based on analyst forecasts compiled by Bloomberg. That means the Andean countries could struggle to find enough cash to continue meeting debt payments and prop up popular social programs that help maintain stability.

“Things are going to get much more difficult if oil prices stay where they are,” Sarah Glendon, the head of sovereign research at Gramercy Funds Management LLC in Greenwich, Connecticut, said in a telephone interview Monday. “High oil prices masked the challenges that both governments had, allowing them to delay very important reforms that needed to take place.”

Venezuela’s Information Ministry and the press offices of Ecuador’s Economic Policy Ministry and Finance Ministry didn’t respond to e-mails seeking comment about the performance of the nations’ debt.

Best Returns

Ecuador’s bonds have returned 7 percent on average since the start of the year, the most among dollar-denominated notes from major Latin American economies, data compiled by Bloomberg show. Venezuela’s gained 6.81 percent.

By contrast, emerging-market securities on average rose just 0.5 percent.

The bonds’ outperformance came as oil prices surged to about $59 a barrel from a six-year low of $43.46 in March.

Among other measures, the two countries also said they obtained at least $9 billion in combined 2015 financing commitments from China, enough to help defy for now the most dire warnings that they were running short of cash.

Even so, Venezuela and Ecuador, Latin America’s only two OPEC members, have burned through foreign reserves. They also enacted policy measures that could choke off economic growth.

In Venezuela, where credit-default swaps traders have priced in a 95 percent chance of default over the next five years, measures to offset the impact of falling oil prices included the creation of the country’s fifth parallel currency market in 12 years to boost the supply of dollars, squeezing its U.S. oil-refining unit for $1.5 billion and dismantling the late President Hugo Chavez’s pet program of providing cheap oil to allies.

Spending Cut

Ecuador’s government cut about 4 percent of its planned 2015 spending, lined up $4.2 billion in credit agreements from China for this year and tapped credit markets for $750 million in March at the highest yield for any sovereign five-year bond since 2002. The government reopened the issuance of its 10.5 percent bonds due in 2020 in May, selling an additional $750 million at a lower 8.5 percent.
As oil recovered, bond yields for the two Latin American countries narrowed relative to comparable U.S. Treasuries.

The extra yield, or spread, on Venezuela’s bonds instead of U.S. Treasuries narrowed to 26.95 percentage points as of 12:07 p.m. in New York from more than 34 in January, according to JPMorgan Chase & Co. For Ecuador, the spread fell to 8.22 percentage points from more than 10 in January.

Ecuador and Venezuela bonds “were penalized harshly at the end of last year because of oil prices,” Santiago Mosquera, vice president of Quito-based brokerage Analytica Securities, said in a telephone interview. “From here out, I don’t see any possibility for a reduction in spreads in Ecuador, except if oil rises or the political outlook somehow changes magically.”