2 November 2017


In January of 2005, Standard & Poor’s cut its long and short-term foreign currency sovereign ratings on Venezuela to Selective Default (SD), citing a delay by Venezuela in calculating and paying its Oil Indexed Obligations, a warrant leftover from the Brady Plan restructuring of Venezuela’s defaulted debt in 1990. Venezuela subsequently paid the $359,812 that they calculated was owed on the oil warrants including applicable interest from October 15 on March 3, 2005 and S&P then raised their rating back up to B from SD.


To this day, Venezuela’s 2004-2005 default is counted by Professors Carmen Reinhart and Kenneth Rogoff in their seminal count of country defaults. (Since independence, Reinhart and Rogoff count 10 defaults by Venezuela on its bonded external debt: 1826, 1848, 1860, 1865, 1892, 1898, 1983, 1990, 1995, and 2004).


Reinhart and Rogoff may be about to add number 11, but not for the reason most expect — again it may be those pesky Oil Indexed Obligations.


Since the beginning of October, Venezuela has been following what we predicted as the Rope-A-Dope strategy. Venezuela and PDVSA will take the hits from not paying their bond interest payments on the due dates, using the 30 day toll period (I can’t stand to use the word “grace” [as in “grace period] regarding this this narco-trafficking, human rights abusing, economy & country destroying kleptocratic dictatorship, as they are so, so far from “grace”). Under our Rope-a-Dope strategy, at the same time as they use these 30 day periods, Venezuela and PDVSA are likely to pay the principal amortizations (PDVSA 2020) and maturities (PDVSA 2017) on the day they are due as the contract calls for (otherwise it is an “event of default” allowing for acceleration of the debt and cross-default to other securities). By using the 30 day period — the “technical default” of not paying interest coupons on the due date does not become an “event of default” until it lasts longer than 30 days — Venezuela is able to roll the payments of the October-November bond debts of $3.6 billion over 3 months into December, with their last PDVSA bond coupons of November for $254 million due on November 17 being rolled to be paid by December 16.


The problem with the Rope-a-Dope strategy is that it is fraught with danger of mistakes. Keen Venezuela observers will have seen one happen this week — and it is with those pesky Oil Indexed Obligations again.


On October 31, Bank of New York, as the Fiscal Agent for the 1990 Oil Obligations, hurriedly published the following notice in the Financial Times:



The notice varies from the 23 year practice of these notices, which are supposed to take place on or around the October 15th and April 15th payment dates and don’t normally say that BONY (or Chase before them) have received the cash but it won’t be distributed until the following month.


Here for example is April 2015:



Or October 2014:



That is because the original Oil Indexed Payment Obligations addendum to the Venezuela Par and Discount Brady bonds lists the payment dates and period for the 30 year life of the instrument and importantly says that they must be paid to holders within 15 days of those dates (April 15 and October 15).



So, this is why Venezuela — which has so far not paid any of its coupons from October (PDVSA has paid the $41 million on the PDVSA 37 for some reason, but Venezuela has not paid the Venezuela 2019, Venezuela 2024, Venezuela 2025 and Venezuela 26, nor Electricidad de Caracas) jammed Bank of New York with $74 million ($3 each) for holders of the oil warrants. The rub is that the language above says it must go to the end holder within the 15 days after the obligation date (not the paying agent). As a result, S&P and perhaps the Determinations Committee of ISDA may end up deciding whether the default on these oil indexed obligations are a failure to pay and/or Selected Default.


Three other quick notes on these Oil Indexed Obligations.


First, the money is in the bank for Oil Index Obligation holders by November 13 to be paid $3 each on November 20. You could have bought these warrants for a little over 4 bucks at the beginning of the week. They are now closer to $8, but paying $6 a year.


Second, these Oil Indexed Warrants are on the U.S. Treasury OFAC General License #3 as legally permitted to trade. That General License 3 was also just incorporated into ISDA’s new Venezuela Protocol for CDS eligibility last week.


Third, ISDA changed its CDS rules to count warrants in 2014 in the wake of the Greek debacle as part of what they now call a “Package Observable Bond.” Whether this would qualify as a “deliverable instrument” is open to debate but is likely to be decided by ISDA’s Determinations Committtee.


In the end, what this screw-up shows is that the possibility for Venezuela and PDVSA to make mistakes as they embark on this Rope-a-Dope strategy of burning their 30 day default periods is high. Watch this space.