Reports from Cuba’s Venezuela: S&P downgrade of Venezuela’s debt to add to the noise

Via The Devil’s Excrement:

S&P Downgrade Of Venezuela’s Debt To Add To The Noise

As if there was not enough noise around Venezuela’s and PDVSA’s debt, credit agency S&P downgraded Venezuela to CCC+ this afternoon, citing concerns about the economy, inflation and increasing risk. This announcement will certainly add to the confusion of the last week or so, where the default opinion piece of Hausmann and Santos, has generated so much discussion and interpretations of what was said, creating such a stir that President Maduro ordered the Prosecutor to ¨take action¨ against Hausmann for seeking to destabilize the country.

One has to wonder what Maduro will say about S&P now.

But in reality, the announcement by S&P is not surprising, because the rating agency already had placed Venezuela on “negative watch“, suggesting that it was considering downgrading Venezuela’s sovereign debt. (So far, the downgrade only applies to the Republic’s debt, but a similar downgrade of PDVSA is likely to follow base on the criteria usually followed by credit rating agencies that no risk can be higher than the sovereign one)

According to the definition by S&P, this downgrade to CCC+ means that Venezuela is “vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.” S&P is not suggesting that there will be a default anytime soon, but that things are getting complicated. But we are sure that the announcement will be misinterpreted.

And I say this, because during the last week, there have been many misinterpretations of statements made by a number of people (including me) and in both Twitter and blogs, terms have been confused.

As an example, I made statements in Twitter that I did not recommend investing in Venezuela and PDVSA bonds at this time, which was taken by some as an indication that I thought Venezuela would default. As I made clear in the previous post, I do not believe that Venezuela will default in October, or that Venezuela is likely to default in 2015 or even in 2016. What I am saying is that on a risk adjusted basis, the return on Venezuelan and PDVSA bonds are just not high enough for the  lack of transparency on the country’s numbers, the political uncertainty and the volatility that these bonds exhibit.

Take, for example, the PDVSA 2022 bond, one of the people’s favorites because of its high 12.75% coupon. Today that bond was yielding about 16.1% per year if you held it until 2022 and had a “current yield” of 14.66%. The latter means that if you buy the bond today at around 86% and in one year it is still at 86%, you will make 14.6% on your money. This is what that this bond has done since the beginning of the year:


As you can see, it started the year at about 92%, dropped in six weeks to 75%, bounced back to 104% only to drop to 80% once again with all the default talk and recovered some to close today at 86%. That is a19% drop, a 38.7% rise and a 23% drop in the space of less than nine months.

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