(Updates with analyst’s quotes paragraph 15)
By Walter Brandimarte and Manuela Badawy
NEW YORK, May 2 (Reuters) - Investors reduced exposure to Venezuela’s sovereign debt on Wednesday on fears that the country’s decision to leave the IMF could trigger a technical default on its external bonds.
Total returns on Venezuela’s debt declined 0.6 percent on JP Morgan’s EMBI+ index 11EMJ after President Hugo Chavez announced on Monday that Venezuela will withdraw its membership from Washington-based lending organizations like the IMF and the World Bank.
Chavez’s decision spread uncertainty among bondholders because most sovereign bonds issued on international capital markets carry a clause stipulating the country issuer must remain a member of the IMF, analysts said.
Failure to comply to that rule would allow bondholders to force the issuer to pay its debt in advance, an event known as “technical default.”
“In the case of Venezuela, all of the debt issues that we have been able to review include a very clear clause on the ‘Default and Acceleration of Maturity’ chapter,” Bear Stearns analyst Alberto Bernal wrote in a research note.
The bank mentioned, as an example, the prospectus of the Venezuelan global bonds due 2034 VENGLB34=RR, which states that “Venezuela ceasing to be a member of the IMF or ceases to be eligible to use the general resources of the IMF is an event of default.”
“From a practical standpoint, we are not sure what this means for bond prices, since most Venezuelan bonds are trading above par,” Bernal said, while cutting the recommendation on the country’s debt to ‘underperform’ from ‘outperform’.
In another note, RBC Capital Markets said near $21 billion of Venezuelan dollar and euro-denominated government debt could be directly impacted from a technical default event.
“This compares with $28.5 billion in foreign reserves at the central bank and approximately $15-20 billion in the Fonden fund,” the bank said, recommending investors to “stay clear” of Venezuelan bonds until uncertainties are lower.
Venezuelan Finance Minister Rodrigo Cabezas said the country’s planned withdrawal from the IMF will not affect its payment of foreign debt.
In an interview with Reuters, he reaffirmed that Venezuela “guarantees the payment of all its debt, foreign or local, short or long dated.”
Analysts also said bondholders do not have a clear reason to accelerate bond payments as most of its external issues are trading above par.
According to Bear Stearns, the country’s global bonds with low dollar price (maturing in 2010, 2016, 2020) could be favored in the event of a technical default, while the more high price ones (2013, 2018, 2027 and 2034 issues) would suffer. Moreover, investor’s appetite for high-yielding bonds remain strong and Venezuela still has good market access, experts said.
“From a distance, given all the liquidity options likely available to it today, I wouldn’t imagine the Government of Venezuela is feeling all that threatened in the short term by the prospect of a technical bond default,” said Timothy DeSieno, partner at law firm Bingham McCutchen LLP.
“If necessary, one possibility would be the replacement of any technically defaulted bonds with amended or new bonds that are not conditioned on IMF membership.”
For prices of Venezuela’s global bonds, see <0#VEGLB=>.