The price of Venezuela’s defaulted debts surged by 24 per cent on Monday following the US apprehension of Nicolás Maduro, delivering a windfall to hedge funds and other investors who had snapped up the bonds for cents on the dollar.
Venezuela’s government bonds, in default since 2017, jumped to 41 cents on the dollar on Monday, up from 33 cents before the US operation to remove the Venezuelan president. Debts of PDVSA, the state oil company, also gained, with bonds maturing in 2035 rising from 26 cents to 33 cents.
The rally — which has been gathering steam since October — has rewarded managers who spent years building positions in unloved debt with a face value of $60bn, but which had traded at 16 cents on the dollar as recently as a year ago. Many investors had abandoned the trade due to US sanctions and Maduro’s seemingly unshakeable grip on the country, and few were willing or able to place new bets on the bonds.
Hedge funds profiting from Monday’s rally include London-headquartered Broad Reach and Winterbrook Capital, while asset managers Allianz Global Investors and RBC BlueBay have also made gains.
Other funds have outstanding bets on Venezuelan assets, such as Elliott Management, which recently won a legal battle to take control of a major refinery previously controlled by PDVSA. Elliott needs US approval to close the sale, which creditors now see as more likely.
“Venezuela is out of the deep freeze and back in play,” said Edward Cowen, chief executive of Winterbrook Capital, a London-based specialist asset manager that advises and manages more than $220mn in Venezuelan assets.
“There will be an evolution of investors from distressed debt and emerging market investors to broader credit, oil and more mainstream investors” coming into the bonds, he added.
The price of the bonds collapsed in 2019 following the imposition of US sanctions on PDVSA’s oil sales, Venezuela’s financial lifeblood. Sanctions on US-linked entities trading the bonds were imposed from 2017 and were only lifted in 2023. Despite Monday’s rally, the bonds remain thinly traded compared with other emerging market bonds.
Broad Reach, a $2bn-in-assets emerging markets specialist, began building a position in Venezuelan sovereign debt and PDVSA bonds before Donald Trump’s 2024 US presidential election win and added to it early last year after seeing “signposts” of change in the country, said Bradley Wickens, the firm’s chief investment officer and chief executive.
These signposts included evidence that the opposition had won last year’s elections as well as signs of US engagement, such as the renewal of a licence for oil company Chevron to operate in the country and talks led by Trump envoy Richard Grenell.
“These were all small signs pointing to a change in the direction of travel for Venezuela. This kept us comfortable with the trade, and this was before any military assets were deployed,” Wickens said.
Venezuela has been the main contributor to the fund’s return before fees of 5 per cent in the opening days of January, a person familiar with the matter said. Last year, it made 12 per cent after fees.
Some large institutional investors also bought Venezuelan bonds at prices well below current levels in recent years. Allianz Global Investors paid about 10 cents on the dollar during the coronavirus pandemic, said Alex Robey, a portfolio manager at the German investment group.
“We also anticipated a positive investor reaction towards any regime change and have maintained exposures to benefit from the positive price action we see today,” he said.
Maduro’s removal may also provide a boost to funds that found other ways to profit from Venezuela’s complex debts.
In November, Elliott won a contest to take control of Citgo, a US refiner owned by PDVSA, in a Delaware court-arranged sale for paying creditors. Elliott affiliate Amber Energy won an auction with promises to pay about $2bn to holders of a particular PDVSA bond that was secured with Citgo collateral.
The sale is subject to appeals by other creditors and dependent on US authorisation.
Estimates for the recovery value of Venezuela’s sovereign bonds vary widely from below 30 cents to 40 cents and higher. While the country’s debt pile is now much larger than the size of its battered economy, investors also hope a revival in oil production will boost future debt payments.
When unpaid interest is included, analysts estimate that the bonds of Venezuela and PDVSA could make up $100bn out of an estimated $150bn to $170bn in total external debt, which includes bilateral loans from China, Russia, Iran and others as well as international arbitration claims on the government.
In comparison, the country’s annual GDP is about $80bn, according to IMF estimates last year, or less given a drop in the currency, and could be about half its size before the 2017 default.
However, after such a large rally and with huge uncertainty surrounding any restructuring, some managers are wary.
“As bonds have approached our assessment of future recovery value, we are becoming more cautious,” said Allianz’s Robey.
One emerging market hedge fund manager with a small position in Venezuelan government bonds expressed caution about building big bets on the country, citing the huge uncertainty over what happens next.
“This is a casino,” said the executive. “You can’t put material risk on a trade where you have 60 per cent chance of positive outcome but there is a serious risk of material downside.”