Maria Elena Vizcaino, Bloomberg News

MEXICO CITY
EnergiesNet.com 11 02 2023

Bonds from Venezuela and its state-owned oil company entered an observation period for JPMorgan Chase & Co.’s widely followed emerging-market bond indexes.

About $53 billion worth of Venezuela’s sovereign bonds and Petroleos de Venezuela SA’s notes have been placed on an index watch for JPMorgan’s EMBI index series until Jan. 31, a team led by global head of index research Gloria Kim wrote in a Wednesday note. At the end of the period, which may be extended, the firm plans to clarify the debt’s treatment in its benchmarks.

The announcement comes just weeks after the Biden administration allowed US investors to buy the debt for the first time in four years as part of a sweeping sanctions relief package. 

“This review was prompted after the removal of secondary trading ban on certain Venezuelan sovereign and PDVSA debt,” according to the note. JPMorgan in 2019 moved the debt to a weighting of zero after a secondary trading ban was imposed, disrupting the market. Venezuela had started defaulting on roughly $60 billion of sovereign and PDVSA bonds back in 2017.

A re-weighting of Venezuelan bonds in emerging-market sovereign indexes, however, could lead to as much as $1.5 billion in market value demand, according to Simon Waever, Morgan Stanley’s global head of EM credit strategy.

During the observation period, 20 Venezuelan and PDVSA bonds will remain at zero-weight in the EMBI index series, according to JPMorgan. The firm plans to monitor secondary-market trading, liquidity and verifiable two-way pricing for benchmarked investors, as well as the “durability of sanctions relief” for trading.

So far, JPMorgan said feedback from investors is evenly split, with about half in favor of restoring Venezuela’s market-value weight in the index. 

The other half prefer “a more measured wait-and-watch approach aligned with policy trajectory around sanctions relief,” according to the note. Sanctions that prohibit Venezuela and the state driller from selling new debt in the US remain in place. 

Even so, the easing of rules last month helped spur a rally in the notes. Venezuela’s sovereign bonds due in 2027 have risen about 8 cents to 18.7 cents on the dollar since Washington pulled back on sanctions. And oil notes due in 2020, which are backed by shares of Citgo Petroleum Corp.’s parent company, are up about 38 cents to around 84 cents on the dollar, according to Trace data.

As part of the sanctions relief, the US has been pushing President Nicolas Maduro to hold free and open elections when the country votes for a president next year.

“While this decision could have temporary short-term technical implications for the market, the story remains mainly dependent on the evolution of political events which — for now — remain very uncertain,” said Alejandro Arreaza, an economist at Barclays in New York. “We are in a situation in which the debt can be traded, but it cannot be restructured. For a restructuring to be possible, there needs to be further progress in political negotiations.

bloomberg.com 11 01 2023