By Jaime Reusche
& Yves Lemay
NEW YORK -- Moody's Investors Service has today downgraded the Government of Venezuela's foreign currency and local currency issuer ratings, foreign and local currency senior unsecured ratings, and foreign currency senior secured rating to C from Caa3. Concurrently, the foreign currency senior unsecured medium term note program has also been downgraded to (P)C from (P)Caa3. The outlook has been changed to stable from negative.RATINGS RATIONALE
The key drivers underpinning the ratings downgrade are:
1) Moody's expectation that the continuing erosion of Venezuela's payment capacity will lead to heavy losses to bondholders, with ongoing defaults on interest payments on various bonds compounded by upcoming principal maturities
2) The limits on Venezuela's ability to restructure its debt posed by current US sanctions that prevent US investors from accepting new debt instruments under a potential debt exchange, which will further exacerbate losses.
In a related decision, Moody's lowered Venezuela's long-term country ceilings: the local-currency country ceilings for bonds and bank deposits to Ca from Caa2; the foreign-currency bond ceiling to Ca from Caa3; the foreign-currency bank deposit ceiling to C from Ca. The short-term foreign currency bond and deposit ceilings remain unchanged at Not-Prime (NP).
Today's action signals that in Moody's view Venezuela's capacity to service its principal and interest obligations will remain severely impaired, and that losses to bondholders will be very high, most likely in excess of 65%. This view principally reflects the following drivers.FIRST DRIVER: CONTINUING EROSION OF PAYMENT CAPACITY AND FURTHER DEFAULTS ON UPCOMING PAYMENTS WILL COMPOUND LOSSES
The ongoing decline in Venezuela's oil production is likely to be sustained and will further pressure foreign currency cash flows, with severe hard currency shortages unlikely to abate. The prospects for Venezuela's oil sector are likely to mirror the country's worsening financial situation. The country's large external funding gap and diminishing financing sources imply that upcoming debt service payments will continue to be missed. Already since November 2017 when the first defaults on market debt occurred, pending coupon payments due from both the sovereign and the state-owned oil company PDVSA have surpassed $1.7 billion.
Given that the government has so far made late payments only on PDVSA coupons that went beyond 30-day grace periods and not on sovereign coupons, it is increasingly likely that the government will not be able to meet upcoming principal payments on its market debt, the first falling in August 2018 for $1.05 billion. Even though the authorities have signaled that they plan to remediate some of the late payments on interest on both PDVSA and sovereign bonds, cash flow pressures from the lower oil production will weigh heavily on their ability to clear all arrears. We expect that losses on principal and interest will be very high and consistent with a C rating.SECOND DRIVER: CONSTRAINED ABILITY TO RESTRUCTURE DEBT WILL EXACERBATE LOSSES
The current US sanctions against Venezuela contain restrictions that make it impossible for the country to refinance, and hence restructure, its outstanding market obligations on debt held by US companies or investors despite President Maduro's announcement on 2 November 2017 that the government intends to restructure its debt. Even if there were investor appetite to restructure Venezuela's debt, current sanctions would make this unlawful for US bondholders to do so. The inability to ease near-term liquidity pressures through a formal restructuring will exacerbate the government's financial constraints and heighten losses to bondholders.
Moreover, the US government has suggested further sanctions could be forthcoming if, as seems very likely, free and fair elections are not held. The upcoming presidential election in Venezuela that has now been set for 20 May will be boycotted by most of the opposition due to allegations of fraud in regional elections held in October 2017 and in municipal elections held in December 2017. New sanctions following the vote may target Venezuela's oil sector, further undermining the sovereign's ability to clear any arrears or make upcoming payments, potentially requiring greater debt relief in an eventual restructuring.
Because of these additional considerations, losses in past sovereign defaults offer limited visibility for Venezuela. However, while the magnitude of losses if the restructuring actually takes place is highly uncertain, they are in Moody's view very likely to be substantial, consistent with current market pricing of Venezuela's outstanding sovereign debt instruments. As such, very low recovery values for bondholders, in line with Moody's lowest rating of C, are likely.WHAT COULD CHANGE THE RATING UP
Venezuela's sovereign rating would move up from the current level of C if a restructuring were to provide sufficient cash flow relief to ease the severe foreign currency liquidity shortages and allow debt service to recommence. A withdrawal of current financial sanctions, or any possible new ones, by the US would enhance Venezuela's ability to orchestrate such a restructuring, which would likely decrease the severity of losses on bondholders somewhat, potentially supporting a higher rating.
GDP per capita (PPP basis, US$): 14,016 (2016 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -16.2% (2016 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 660.1% (2016 Actual)
Gen. Gov. Financial Balance/GDP: -2% (2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.4% (2016 Actual) (also known as External Balance)
External debt/GDP: 94.4% (2016 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 08 March 2018, a rating committee was called to discuss the rating of the Venezuela, Government of. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.