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Venezuela's once pride and joy, oil firm PdVSA is broke. It's not paying bondholders, at least on some issues, and the government is running out of money. Whether the kumbaya socialistas inside Caracas continue to pay Wall Street or use the money to import food and medicines remains to be seen. It will likely be known sooner rather than later. The ruling Socialists United of Venezuela has effectively driven this country into the ground.
"Venezuela and PdVSA have already defaulted to bondholders, (and) the cashflow crunch now threatens the ultimate priority of rental, corruption income to the military," writes Siobhan Morden of Nomura Securities in her latest note to clients.
Furthermore, the collapse in oil production, sanctions and litigation risks all add to the ongoing cashflow constraints that are the ultimate trigger for a political transition.
Most people believe that a political transition means Nicolas Maduro leaves, but his party, PSUV, stays in power.
"I think Trump is going to try to increase sanctions at the Summit of the Americas," says Peter Schechter, host of foreign policy focused podcast Altamar. He is a former director at the Adrienne Arsht Latin America Center in Washington.
The Summit of the Americas starts April 14 in Lima. Maduro is not invited but said he was going anyway. Schechter thinks sanctions on types of Venezuelan crude or sanctioning Citgo, a U.S. subsidiary of PdVSA could come next. High-level individuals are sanctioned already for upending the nation's congressional authority and creating a committee of 'yes men' instead. And for the ongoing humanitarian crisis now spilling into neighboring countries, primarily Colombia.
Distressed asset lovers and emerging market bondholders have been buying and holding PdVSA for much of the last two years, hoping Maduro would fail to win a second term in November 2018. Maduro has called for early elections instead, now scheduled for May 20. Only he has banned top line opposition leaders from running.
PdVSA bond prices have traded higher on the expectations of payment. The PdVSA 2022 interest payment was recently made, 114 days after its due date. However, the failure to communicate payment on another issue this week does not show a priority of honoring PdVSA coupon payments going forward, Morden says.
"We assume the more dominant influence for the latest gains has been the increasing expectations of a potential regime change through the election headlines and recent military arrests," she says. Maduro has been purging military officials deemed disloyal to PSUV.
Risks will rise through May as the country continues to bleed out its cash.
"It will be increasingly difficult for President Maduro to survive the cashflow stress while the U.S. ultimately holds the leverage via trade sector sanctions or litigation," Morden says.
