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Venezuela oil giant on the verge of defaulting on massive debt payment

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Venezuelan oil giant, Petróleos de Venezula, S.A. (PDVSA), appears to be set to default on a critical debt payment due Friday, causing concern within the market. Bonds issued by the firm dropped sharply as cash-flow problems and regulatory barriers have made it increasingly difficult for them to make payments on the $2 billion they owe to various creditors over the coming weeks.

The state-backed company saw a brief resurgence in bond prices just two days ago when a report came back that they had already made good on two overdue bond payments and were in the midst of approving Friday’s payment of nearly $985 million. Today, however, PDVSA did not make an announcement or give a press release confirming the news as was expected causing panic among investors.

In a comment to CNBC, Raymond Zucaro, chief investment officer at emerging markets investment firm RVX Asset Management, said “PDVSA and the government have been quiet, very quiet on it,” ominously adding “The radio silence is deafening.”

The payment is backed by a 50.1 percent stake in PDVSA’s Houston-based refiner Citgo and has no grace period. Defaulting could mean Venezuela would lose majority control of its crown jewel in the country’s energy industry. Additionally, it would trigger default clauses on other PDVSA bonds which could lead to legal disputes with creditors and hurt the country’s standing as a potential commercial partner.

“If they default, that means they’re defaulting on everything,” said Russ Dallen, managing partner at Caracas Capital Markets.

PDVSA owes another $1.2 billion in principle and interest on a separate bond due on November 2nd. To date they have missed seven interest payments totaling $586 million this month alone, and their 30 day grace period is quickly drying up.

Concerns have been raised over U.S. sanctions imposed earlier this year- which some blame for technical issues that have made it difficult to transfer money to bond holders. However, it’s unlikely this is a major factor as Dallen reported that many of his firm’s clients didn’t receive payments from the company on even a relatively small bond of $41 million.

“Of all seven bonds they had to pay, that was the cheapest,” he said. “It’s starting to look like there may be something else wrong.”

Venezeulan President Nicolas Maduro has tried to make assurances that the government intends to pay, commenting that his country is the victim of an “economic war” led by opposition adversaries and the Trump administration. He called talk of defaulting talk from a “right-wing smear campaign.”

Article written by HEI contributor Kevin Abbott.

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