‘Lost Cause’ Company Bond Doubles Amid Venezuela All-Out Rally

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(Bloomberg) — A defaulted bond issued by an old Venezuelan power company and long regarded as a lost-cause by investors has almost doubled in value this year as investors look for ways to profit from Venezuela’s new-found rapport with the US.

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The notes, issued by Electricidad de Caracas, or Elecar, have leaped 98% to about 31 cents on the dollar since December, according to Trace data, triple the return on any other corporate debt in Latin America. That has handed outsize gains to investors like Grantham Mayo Van Otterloo & Co. LLC, which has owned around a quarter of the debt for many years.

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The $650 million of bonds are drawing attention from investors hunting for ways to bet on a recovery in South America’s most distressed debt, after the capture of Nicolas Maduro paved the way for the US to reestablish diplomatic relations. With the nation’s sovereign debt up more than 40% this year — getting a fresh boost from surging oil prices amid the war in the Middle East — traders are looking to smaller, illiquid securities to continue profiting from an eventual restructuring. 

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“As the entire Venezuelan bond complex has gapped higher this year after the ousting of Maduro, investors begin to look for lower priced claims, even if they are less liquid,” said Carl Ross, a partner and sovereign credit analyst at GMO. 

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Nationalization

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Elecar issued the bonds in 2008, shortly after late President Hugo Chavez nationalized the country’s power grid and bundled up several electricity firms — including Elecar — into a state-managed corporation. The notes expired in 2018, and have been in a years-long default along with the rest of the country’s debt. 

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They had traded as low as five cents on the dollar as the US ramped up sanctions against the Maduro administration. Now, as Washington eases sanctions on the energy industry and restores diplomatic ties with Venezuela’s acting administration under Delcy Rodriguez, bondholders see increasing odds of getting paid on their investments.

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Sovereign bonds are trading close to 50 cents on the dollar, while some securities from the state-owned oil company Petroleos de Venezuela SA, PDVSA, have also risen to that level. 

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Restructuring scenarios have improved since Maduro’s exit. Morgan Stanley stated last week that the haircut applied on the bonds could be as low as 30%, given that the country’s oil output is likely to recover faster than previously expected.

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And that haircut may even apply to Elecar.

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“Elecar bonds are governed by New York-law and have no collective action clauses,” making them easier to renegotiate, said Ramiro Blazquez, a strategist at StoneX. “This means that they will likely be included in a future restructuring, as leaving them out could lead to holdouts and litigation prospects.”

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There’s still no clarity about how and when any restructuring of Venezuelan debt will take place. US sanctions continue to prevent investors from engaging in negotiations with the nation’s acting government, which is barred from issuing new debt. 

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But as traders search for value in the Venezuela bond curve, JPMorgan Chase & Co. and Bank of America have been urging clients to buy notes with large piles of unpaid interest.

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“Elecar bonds have likely suffered from low liquidity and were largely seen as a lost cause when prospects for resolving the default appeared remote,” said Alberto Rojas, a senior EM strategist at UBS. “Now, with renewed optimism for Venezuela’s future, Elecar is beginning to respond.”

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