LONDON (Reuters) - A “high risk” of exclusion of Venezuela’s PDVSA bonds from key indexes could hit the country’s sovereign debt as investors may be unable to offload their exposure to the sanctioned state-oil firm, according to Bank of America Merill Lynch (BAML).
Investors have been speculation that index providers such as JPMorgan could exclude PDVSA’s debt from their key benchmarks after the United States imposed sweeping sanctions on the firm on Monday.
“As a result, benchmarked investors would become overweight Venezuela risk,” Jane Brauer, sovereign debt fixed income strategist at BAML wrote in a note to clients late on Tuesday.
Trading in Venezuelan debt ground to a halt on secondary markets on Tuesday, further adding to expectations that the debt could be excluded. Liquidity - the ease of trading - is a key requirement for index membership.
“We believe that if benchmarked investors cannot exit their PDVSA positions, that they will reduce positions in Republic bonds instead, putting downward pressure on Republic bond prices,” she said, adding that a risk on additional sanctions in future on the sovereign bonds themselves added to the pressure.
PDVSA has a weight of 0.53 while Venezuela Republic bonds were at 0.66 as of earlier this week in JPMorgan’s EMBI Global Diversified index, according to the index provider.
PDVSA’s 2024 issue - previously one of the most heavily traded issues - was indicated at 0.25 cents weaker at 25.25 cents in the dollar on Wednesday. The 2025 sovereign bond showed as being 0.445 cents higher at 31.82 cents, according to Refinitiv data.
Reporting by Karin Strohecker; editing by Marc Jones