The PIIGS of Europe aren’t the only ones with debt troubles. In fact, at the end of the first quarter, Venezuela topped a list of the countries most at risk of default.
Based on the price of its credit default swaps, Venezuela had a 48.5% probability of default in the next five years. Greece ranked ninth with a 25.4% chance, according to credit information specialist CMA Datavision.
There are a variety of reasons often provided for why Venezuela will not default on its sovereign debt. They include Hugo Chavez’ reputation as a regional leader, the fact that most of the debt was contracted by the Venezuelan president himself, and the presence of state-owned Citgo assets in the United States that could be seized by boldholders.
However, these factors seem less and less convincing as the total stock of public debt multiplies and Venezuela’s problems grow, according to Joe Kogan, head of emerging markets strategy at Scotia Capital. He suggests that behind much of the decision to buy Venezuelan bonds is the assumption or hope that the country’s oil could ultimately become available to satisfy sovereign debts in a default. However, he does not expect a default from any major oil exporter anytime soon.
While the scarce number of sovereign defaults by oil-exporting nations in recent history leaves bondholders with little guidance, Mr. Kogan says there is nothing terribly unusual about seizing oil to satisfy debts.
For example, Taiwanese shipping investor Nobu Su had his crude-oil tankers detained in Rotterdam and Delaware in October 2009. The fuel from those ships was seized in response to missed rental fees.
After buying several packages of overdue Republic of Congo debt for cents on the dollar in the 1990s, hedge fund Kensington International chased down oil shipments from the country and pursued it in courts around the world in order to get their money back.
However, litigation and attempts to seize foreign assets are not the most powerful weapon wielded by bondholders, since those approaches are often slow and tiresome. Rather, it is the threat of such action that deters many, Mr. Kogan says.
If President Chavez did choose to default – whether for political or economic reasons – while oil prices were still strong, the strategist is confident that bondholders would go after U.S. assets such as Citgo, which are owned by Venezuelan state oil company PDVSA. Next, bondholders would likely turn to Venezuelan oil exports, which could be used to repay the full amount of its debt.
“Venezuela’s first defense here would be to sell its oil at the port of departure, rather than arrival,” Mr. Kogan says. “By the time the oil reached the Texas coast, it would be the property of the buyer and no longer attachable.”
Venezuela would also look for other customers for its oil. If it sold its oil to a company in China, Mr. Kogan notes that creditors would have a very hard time getting at either the oil or the receivables.
So while the probability of a Venezuelan default remains relatively low, the country has top-notch legal counsel in the United States that is surely aware of all these issues.
Venezuela exported 1.6 million barrels of oil per day in February, so current prices correspond to annual revenues of US$42-billion. Given its US$1.3-billion in annual interest costs and a probability of success in litigation to seize Venezuelan oil assets above 3%, Mr. Kogan says the country would be better off paying its debt than defaulting. “We think the probability is higher than that, and for this reason, Venezuela will continue to pay as long as oil prices remain high.”
Jonathan Ratner
Read more: http://network.nationalpost.com/NP/blogs/tradingdesk/archive/2010/05/03/is-oil-venezuela-s-sovereign-debt-solution.aspx#ixzz0msoe0fz6
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