Venezuela bonds attract buyers after US rapprochement

A bond trading at 10 cents on the dollar is the most “problematic” between “problematic”.

And yet in Venezuela, which has been mired in default for years, when prices rose this week around that level, it was a sudden sign of growing optimism. Just two weeks ago, they were trading at just six cents.

The rise occurs as a result of the approach of the Biden Administration to the Venezuelan government. With the Russian invasion Ukraine threatening to cut off a key source of oil, United States is discussing the possibility of lifting some of the sanctions imposed on the Nicholas Maduro to allow more Venezuelan oil to be sold on international markets. Biden sent a delegation to Caracas earlier this month to begin negotiations despite the fact that the US does not even officially recognize Maduro as the leader of Venezuela.

“It’s a pretty positive development,” said Carlos deSousa, investor of Vontobel Asst Management on Zurich. “It’s totally unexpected, but I guess the US has to choose to deal with the least bad dictators in the world.”.

Traders speculate that the removal of some oil sanctions could also lead to a loosening of restrictions on investing in Venezuelan bonds. U.S. investors are currently barred from buying the country’s debt, which has made it impossible for Maduro to reach a restructuring deal with creditors, something he and his aides have repeatedly said they want to do. European investors, who are not subject to the same sanctions, have been some of the most aggressive buyers of bonds this month, according to traders.

Venezuela and its oil company PDVSA breached for the first time $60 billion of debt in late 2017 and in 2019 sanctions aimed at toppling Maduro were imposed that included a ban on US investors buying the bonds. Maduro’s isolation from global financial markets forced him to turn even more heavily to his ally Vladimir Putin. Now the US is trying to drive a wedge between the two authoritarian leaders.

After the meeting in Caracas attended by the main director to National Security Council Western Hemisphere Affairs, John Gonzalezand the US ambassador to Venezuela, james storytwo imprisoned US citizens were released in the most significant sign of commitment since the sanctions were applied.

Since March 4, Venezuela’s bonds due in 2027 have risen to around 9.4 cents on the dollar, from six cents, while PDVSA securities due in 2022 are now trading around seven cents, from the four cents before the meeting, according to data compiled by Bloomberg. Interest and activity have increased since the trip, according to traders and brokers familiar with the transactions who are not authorized to speak publicly.

After protests from both the side of Guaido As of U.S. lawmakers critical of outreach to Maduro, Biden Administration officials said any path to sanctions relief would require “concrete steps” of Maduro and that there are currently no detailed talks to guarantee Venezuela’s oil. Crude prices have also tapered off their gains since then.

“The US Administration seems to have backed off a bit”said Ray Zucarochief investment officer of RVX Asst Management on Miami. “There is much less pressure than there was with oil at $125.”

Of course, as the prices suggest, many obstacles remain to the lifting of sanctions. Officially, the US does not recognize Maduro as the legitimate leader of Venezuela, and despite having the world’s largest oil reserves, the South American country is pumping only a fraction of what it used to.

But if a restructuring were to occur in the not-too-distant future, some are already trying to calculate salvage values. Maduro’s economic team has had recent calls with bondholders.

“In the coming weeks, new buyers will appear as positive news continues to emerge from the US-Venezuela interactions”said dean tylerhead of global markets BancTrust based in London. “Expectations are building for sanctions relief, at least in the form of oil industry sanctions, if not also sanctions on financial instruments with some holders.”