Morgan Stanley expects Venezuela's bonds to soar in restructuring

The value of Venezuela's government and state oil firm ​bonds could surge when they ​are eventually restructured, analysts at Wall Street investment bank Morgan Stanley said ​on Tuesday. Washington's capture of Venezuelan President Nicolas Maduro in January has sparked speculation about when and how the country's huge debt can be written down to help revive its fortunes.

While the ‌U.S. will ⁠need to ⁠ease sanctions for a restructuring to happen, Morgan Stanley said the country's oil production could ramp up ​far quicker than predicted and get to around 2.2 million barrels a day by 2030.

That could ​reduce the required writedown on what Morgan Stanley estimates to now be $190 billion of Venezuelan debt to 30%.


Factoring in an "exit yield" of 11% would leave the sovereign bonds ​worth around 58 cents on the dollar on average, ⁠compared to ‌around 45-46 cents currently.

Those of state oil firm PDVSA ​could also jump ​to around 50 cents based on an exit yield of ⁠11.5%, from roughly 34-35 cents now.

"Restoring oil output is the ​only way creditors will be repaid and it is clearly ​also a key priority of the U.S. administration," Morgan Stanley's analysts said in a research note.

"We think it (the bond market) should price a higher chance of a faster oil recovery scenario ... which would (leave) another 33% upside from current (bond) prices in a bullish scenario."

Venezuela has not paid its bonds for nearly nine years. A restructuring ‌still needs a number of things to fall into place first, however.

As well as easing sanctions, formal U.S. recognition of the current Venezuelan ​authorities is ​vital to allow talks ⁠between Caracas and its creditors to start, while the International Monetary Fund would also need to properly assess the country's finances.

In a scenario where oil production rebounds more moderately, the ​sovereign and PDVSA bonds were likely to end up roughly where they are currently, Morgan Stanley's analysts estimated.

If a "very harsh" Iraq-style restructuring was forced upon bondholders, however, with unpaid interest payments ignored, PDVSA pushed towards insolvency and some of the country's debt even declared "odious," the bonds could drop around 8% from current levels on average, they added.