By Manuel Orozco
& Lisa M Schineller, PhD
Standard & Poor's
On Nov. 2, President Maduro announced a national commission to pursue a restructuring of all of Venezuela's external debt obligations.
Concrete plans to restructure the sovereign debt would likely constitute a distressed debt exchange and a default under our criteria.
This, in concert with delayed coupon payments on its 2019, 2024, 2025, and 2026 bonds (still ongoing, but within the grace period), demonstrates significant fiscal strain, and we are lowering our long-term foreign currency sovereign credit rating on Venezuela to 'CC' from 'CCC-'. Our long-term local currency rating remain unchanged at 'CCC-'.
We are placing the ratings on Venezuela on CreditWatch with negative implications, reflecting our view that the sovereign could miss a payment on its outstanding debt obligations or advance a distressed debt exchange operation, equivalent to default, within the next three months.RATING ACTION
On Nov. 3, 2017, S&P Global Ratings lowered its long-term foreign currency sovereign credit rating on the Bolivarian Republic of Venezuela to 'CC' from 'CCC-'. The long-term local currency sovereign credit rating remains unchanged at 'CCC-'. The 'C' short-term foreign and local currency sovereign credit ratings also remain unchanged. We placed all ratings on CreditWatch negative.
At the same time, we lowered our rating on Venezuela's senior unsecured debt to 'CC' from 'CCC-' and placed the rating on CreditWatch negative.
Finally, we lowered our transfer and convertibility assessment on the sovereign to 'CC' from 'CCC-'.CREDITWATCH
Our CreditWatch negative placement reflects our opinion that there is a one-in-two chance that Venezuela defaults within the next three months. We could lower our ratings to selective default ('SD') if Venezuela doesn't pay its overdue coupon payments before the stated grace period expires, or upon the execution of the announced debt restructuring.
If the sovereign avoids default on the overdue coupon payments, we could remove Venezuela from our CreditWatch negative list.
The ratings could gradually improve if steps to defuse the heightened political tensions in Venezuela are taken, reducing the risks of eroding governability and high volatility in economic policies. This would have to be accompanied by prompt corrective reforms that begin to address the country's economic imbalances and strengthen its external liquidity.RATIONALE
On Nov. 2, Venezuelan President Nicolas Maduro announced a government commission to restructure the sovereign's and state-owned Petróleos de Venezuela S.A.'s (PDVSA) external debt obligations.
A day later, Venezuelan Vice President Tareck El Aissami announced a meeting with bondholders on Nov. 13, 2017. We are lowering our long-term foreign currency rating on Venezuela to 'CC' because, given the highly constrained external liquidity, we would very likely consider any Venezuelan restructuring to be a distressed debt exchange and equivalent to default (see "Rating Implications Of Exchange Offers And Similar Restructurings, Update").
In addition, in our opinion, U.S. sanctions on Venezuela will most likely result in a long and difficult negotiation with bondholders.
In October, Venezuela used the grace period of most of its external coupon payments to garner enough U.S. dollars to meet PDVSA's debt maturities that were due on Oct. 27 and Nov. 2. In our opinion, the announcement also raises doubts about Venezuela's willingness and capacity to pay its overdue coupon payments, currently on its stated 30-day grace period, of its 2019, 2024, 2025, and 2026 bonds. According to our methodology, we will lower the issuer credit rating to 'SD' and the affected issue to default ('D') if the sovereign doesn't make the payment within the stated grace period (see "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings"). The president did not indicate that the government would not pay these coupon payments within the grace period, but capacity is constrained.
Venezuela is also late and beyond its stated 15-day grace period for a coupon payment on its oil-indexed payment obligations. The coupon payment was due on October 15, and Venezuela's payment agent publicly confirmed that it received the money on October 26. According to the payment agent, the deposit was not made in time, and the payment date was announced for November 20. In our opinion, based on our "Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings" criteria, the delay relates to a noncredit extraordinary event, and therefore we do not characterize it as a default.
We believe the government is less likely to default on its local currency-denominated debt, and President Maduro made no mention of any intention to restructure this debt. Therefore, our long-term local currency rating on Venezuela of 'CCC-' is one notch higher than the long-term foreign currency rating.RATINGS
Foreign Currency: CC/Watch Neg/C
Local Currency: CCC-/Watch Neg/C