Venezuelan President Nicolas Maduro’s government and state-owned companies owe nearly $8 billion in unpaid interest and principal following this year’s default on bonds amid a hyperinflationary collapse of the country’s once-wealthy but now socialist economy. Aid groups estimate that 1.6 million to 2 million Venezuelans will leave the country by the end of this year to escape hyperinflation and the extreme scarcity of food and medicine.
A group of creditors comprised of five investment funds has demanded payment on $1.5 billion in defaulted Venezuelan bond, kicking off a long-awaited showdown between creditors and the crisis-wracked OPEC nation. This is the first step in a potential legal campaign by creditors to recover their investments. The decision could trigger similar efforts by investors holding $60 billion in outstanding bonds issued by Venezuela and state oil company PDVSA. That could pave the way for a creditor dispute similar to the one that roiled Argentina for a decade.
The move, known as “acceleration,” means the bond in question must be paid immediately, but in practice it is unlikely that Venezuela would do so and could require years of litigation before investors recoup their money. The investors have not yet taken their claim to courts in New York, which govern the terms of the dispute related the bond in question, according to the group’s lawyer Mark Stancil of the Washington-based law firm Robbins Russell. Mr. Stancil said the group filed the acceleration request to Bank of New York Mellon Corp, the fiscal agent for the bond, on December 6, and also notified David Syed of the law firm Dentons, which is representing Venezuela.
Creditors do not believe Maduro is willing or capable of carrying out a restructuring process even though he has said he wants to do so. The acceleration move coincides with a recent flurry of activity among other Venezuelan creditors, including one group which last week said it had hired law firm Cleary Gottlieb Steen & Hamilton LLP to advise on strategic alternatives.
Venezuela and PDVSA bonds provided juicy yields due to high oil prices for years, making them a mainstay of emerging market bond funds that wanted to outperform the market. After most of them defaulted, the bonds now trade at a discount of more than 70 percent, while almost all of PDVSA’s bonds are marked down by more than 80 percent. President Maduro has said American financial sanctions have prevented Venezuela and PDVSA from making timely payments. Investors have noted that PDVSA has made interest payments on several bonds, including the 2020 issue that is backed by shares in its U.S. refining subsidiary Citgo.