Citi Predicts Major Venezuela Bond Rally If US Pressure Topples Maduro

Venezuela’s defaulted bonds could surge in value. This prediction comes from analysts at Citigroup. They see a path for prices to jump 30% to 60%. This hinges on a potential political shift in Caracas.

The rally depends on U.S. pressure leading to a change in leadership. If President Nicolas Maduro exits, a historic debt restructuring could follow. This event would be one of the largest ever seen globally.

How a $170 Billion Debt Overhaul Could Unfold

Citi’s analysis provides a clear roadmap. The total debt needing restructuring is massive. It is estimated at roughly $170 billion. This includes $110 billion in government debt. State oil company PDVSA owes another $60 billion.

According to the analysts, a 50% “haircut” is the minimum required. This write-down is needed to make the debt sustainable again. It would reduce the total stock to about $85 billion. The country’s payment capacity could then support new bonds.

The proposed solution involves new financial instruments. Investors might receive a 20-year “new bond” with a 4.4% coupon. They could also get a separate bond covering unpaid interest. Together, this package could be worth mid-40 cents on the dollar.

The High-Stakes Bet on Geopolitical Change

The bond market is betting on geopolitics. Prices have swung with U.S.-Venezuela relations for years. A sharp rally started earlier this year. It coincided with increased U.S. naval activity and political pressure.

For investors, the potential upside is significant. Most bonds currently trade between 24 and 29 cents due to default. The Citi forecast suggests a rise to the mid-40s. An extra “value recovery instrument” tied to oil revenue could push values even higher.

The path remains highly uncertain. It is entirely contingent on a change in Venezuela’s political situation. The U.S. strategy of escalating pressure is the catalyst being watched. The eventual restructuring would be a complex, unprecedented financial undertaking.

The analysis presents a high-risk, high-reward scenario for speculative investors. The future of Venezuela’s debt ultimately rests on a political resolution. The potential for a major bond rally hinges on a successful Venezuela debt restructuring.

Info at your fingertips

Q1: What is Citi’s prediction for Venezuela’s bonds?

Citi analysts forecast that Venezuela’s defaulted bonds could be worth 30% to 60% more than current prices. This would happen if a political change allows for a massive debt restructuring. They see a potential value in the mid-40 cents on the dollar range.

Q2: How much total debt needs restructuring?

The total debt requiring restructuring is estimated at roughly $170 billion. This includes about $110 billion owed by the Venezuelan government itself. State oil company PDVSA accounts for over $60 billion of that total.

Q3: What would a restructuring deal look like?

Citi suggests a deal could involve new bonds for investors. One could be a 20-year bond with a 4.4% coupon. Another could cover unpaid interest from the default period. Combined, they might form a recovery package.

Q4: Why are bond prices moving now?

Bond prices have rallied on expectations of a regime change. This follows increased U.S. pressure on the Maduro government. Actions like a U.S. Navy drug interdiction operation have influenced market sentiment.

Q5: What is the main risk for investors?

The primary risk is political. The entire forecast depends on President Nicolas Maduro leaving power. Without a political shift, the restructuring cannot begin, and bonds may remain in default.

Q6: What is a “value recovery instrument”?

This is a proposed extra component for creditors. Its value would be linked to Venezuela’s future oil revenue. It could boost the total recovery value for bondholders into the high-40 cent range.