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Venezuela Just 24 Hours Away From Formal Declaration Of Default

Less than a week after Venezuela shocked the world by announcing it would proceed to restructure its massive external debt, even as it was within the grace period on hundreds of millions in unpaid interest expense, on Thursday the socialist nation confirmed it has never been closer to an official default after Reuters reported that Venezuela's state oil-firm company, PDVSA, has not made a debt payments to India’s top oil producer ONGC for six months, and has previously used a Russian state-owned bank and another Indian energy company as intermediaries to make payments.

Reuters sources noted that PDVSA has made no payment since April on what was a $540 million backlog of dividends owed to ONGC for an investment the Indian firm made in a an energy project in Venezuela. Venezuela’s President Nicolas Maduro said last week that the country planned to restructure some $60 billion of bonds, much of it held by PDVSA, as the country struggles to meet debt repayments.

While ONGC Videsh -  the overseas investment arm of ONGC  confirmed to Reuters that PDVSA had fallen behind on the payments, but declined to give details on the delays.

Curiously, the Indian company appears not to be overly concerned about non-payment for half a year, and instead was willing to keep giving Maduro the benefit of the doubt: “They have got certain challenges at this stage,” ONGC Videsh said in an emailed response to Reuters’ questions. “They have assured that they are working on it (payment of dues). In due course it will be settled and follow up steps will be undertaken.” And just to underscore that it has no intention of pushing Venezuela into involuntary bankruptcy, ONGC added that “we have a good working relationship with PDVSA."

And while we commend India's camaraderie, Venezuela may be declared insolvent as soon as Friday morning. According to the FT reports that despite promises to the contrary from Caracas, PDVSA did not in fact make a $1.1 billion payment which was due last Friday, and while some bondholders said they expected the money to arrive soon, others pointed out that the payment deadline had clearly been missed regardless.

"There has been no official communication on the payment delays. It is really odd that funds haven’t been received with sufficient time to process if the funds were sent last week as officials indicated,” said Siobhan Morden, head of Latin American bond strategy at Nomura.

As a result, an official declaration of default may be imminent: according to Bloomberg, ISDA has agreed to review a request to determine whether an event of default has occurred due to delayed principal payments on the Petroleos de Venezuela SA bond that matured Nov. 2. The ISDA Determinations Committee will hold its first meeting regarding PDVSA at 11am on Friday, November 10, although at this point the decision is trivial: the 5 year implied probability of a PDVSA default climbed to 99.99% on Wednesday from 93.25% a year ago, according to credit-default swaps data compiled by Bloomberg.

“We’re not sure when or how long this will take, but we wouldn’t expect it to take too long,” noted Stuart Culverhouse, chief economist at Exotix. “It might be possible to argue that Venezuela made the payment but this was not transferred to holders because of problems in the payment chain, although CDS were triggered in Argentina in 2014 in a similar situation.”

In anticipation of the default, international banks and suppliers have reduced, and in most cases halted, credit to PDVSA since cash flow problems led the firm to start delaying payments to creditors in 2014. U.S. sanctions against Venezuelan officials including PDVSA executives, have also deterred banks from offering credit.

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With all that said, the saga of Venezuela's constant "pre-default" state is clearly coming to a close: in addition to the ISDA meeting tomorrow, on Monday, Nov. 13, a bond restructuring meeting is set to take place between the nation and its creditors which however is expected to yield little; in fact US investors will be wary of even attending, given that the person leading the Venezuelan side of the talks, vice-president Tareck El Aissami, has been sanctioned by the US Treasury as an alleged drug smuggler.

Investors had previously said that the potential presence of sanctioned Venezuelan officials in that meeting has raised concerns that joining it could violate sanctions, although Venezuela has promised that no sanctioned personnel would be present.

Investors have valid reason for concern: as Bloomberg reported earlier this week, lead Venezuela debt negotiator is Vice President Tareck El Aissami: he was sanctioned by the U.S. Treasury Department this year after accusations he oversaw a cocaine-smuggling network, and remains one of the nation’s iron-fisted political operatives.

Often in charge of delivering President Nicolas Maduro’s most critical messages, he blasts critics publicly, exposing supposed conspiracy rings and threatening legal action against dissident leaders from National Assembly President Julio Borges to Luisa Ortega, the public-prosecutor-turned-whistle-blower.

And now, Tareck is in charge of convincing bondholders to accept haircuts voluntarily, or as Bloomberg puts it, "of a delicate financial dance in which investors and funds risk running afoul of the U.S. Office of Foreign Assets. Not only do U.S. sanctions prohibit Americans from receiving new bonds that Venezuela would hand them as part of a restructuring, but El Aissami is designated as a narcotics trafficker under the Kingpin Act. American corporate officers dealing with him run the risk of fines and prosecution of as much as $5 million and 30 years in prison."

“Nobody will want to go near something that could be an OFAC violation,” said Robert Koenigsberger, chief investment officer at Gramercy Funds Management, which dumped its Venezuela debt a year ago. “If the Venezuelans say, ‘We want to talk over the restructuring with you,’ I’d say, ‘I’m not letting you in the building.’ I like sleeping in my own bed at night.”

Which means that for those following the Venezuela default drama, next week could be especially exciting.