Caracas Chronicles

Short answer: not yet.

On April 23rd, Bloomberg reported that the Venezuelan government was hiring Rothschild & Co.—a multinational French and British investment bank that sometimes advises and lends to distressed governments and major corporations—as a financial advisor to review its external debt obligations. While Rothschild has worked with the Venezuelan government as a financial advisor in the past (even after Hugo Chávez took office in 1999) and has remained in constant contact, the return of the bank may seem more sensitive due to the ongoing negotiations around the July presidential elections. While Bloomberg highlights that this hiring could be a first step towards a potential debt restructuring, the Venezuelan government has not issued a formal statement. But hiring Rothschild is actually highlighting a complex process and there could be more considerable steps to tackle first. 

According to sources in the financial sector in Caracas, the bond debt is actually decently mapped by the Venezuelan government. But managing assets and liabilities abroad requires a special degree of attention and sophistication. Here’s where Rothschild comes into play.

Thus, sources in the Caracas financial sector say, Rothschild was hired for an advisory review for asset and liability management—a practice used by financial institutions to mitigate long-term financial risks resulting from a mismatch of assets and liabilities—and not a mandate for debt restructuring. 

What does this mean? A review of the balance sheet in search of optimal long-term solutions to mitigate risks on a macroeconomic level while addressing areas such as market, liquidity, and credit risks. For example, how to use assets and mitigate liabilities in the long-term before entering into a debt restructuring. For this, Rothschild would begin by reviewing assets and liabilities abroad to advise on the completion of pending agreements—such as Citgo’s fate, the gold in London and the frozen funds for the humanitarian agreement– and promoting relevant proposals.

Nevertheless, given the current described scenario, this does not mean that in the long-term Rothschild will not be granted a mandate to work on debt restructuring in the future. If this was the case, what things should happen to activate the mandate?

The necessary steps for a Venezuelan debt restructuring 

There are two requirements that need to be met for debt restructuring to move forward: first, the U.S. Office of Foreign Assets Control (OFAC) would need to issue a license allowing the Venezuelan government to re-enter the primary financial market since a new issuance of bonds must be made for a restructuring. In fact, part of Rothschild’s work would be to estimate the possible haircut to be applied, Venezuela´s recovery rate, recovery value, oil production, among others while having access to the country’s international bank accounts—many of which are currently frozen. 

Second, establishing the economic strategy: would it be focusing on both economic growth and honoring external debt, or just on honoring external debt? This is part of a debate, since some prominent economists—like Ricardo Hausmann and Alejandro Grisanti—have highlighted the difficulties of simultaneously paying the debt, growing the economy and tackling the humanitarian crisis. This second element could be the most critical, since with the current oil production of 800,000 barrels per day (bpd) and the monthly injection of approximately $150-$200 million into the banking sector show that cash flows are not enough for repaying Venezuela’s total foreign debt, which could total between $120 billion and $200 billion according to different estimates. 

Now, if a daily production of 2-3 million bpd were achieved—something that would require billion-dollars investments for a decade—the availability of flows to honor debt commitments could be feasible, as an increase of income would be taking place. This scenario could be considered in debt negotiations if a transition is currently being contemplated and the opposition were to win in July, as it would also need to establish its willingness to pay: something that María Corina Machado, for example, has included in her economic plans which contemplate selling and privatizing State assets to cover debt payments.  

A relevant point to mention is that on the government side—ever since the sanctions were imposed—Maduro has also mentioned on several occasions in public events his willingness to pay, so both parties seem to have that aspect in mind.

Whatever happens in July, it is a good time to start organizing outstanding accounts, and it was an optimal decision to work with Rothschild and not to have considered Cuba’s strategy—which tried to pay its external debt with rum in 2016 and decried external debt as a “blackmail mechanism” in 1985. This decision partly demonstrates the seriousness of the Venezuelan government in its approach, which could generate a bit more confidence for the international community.

Soon, we’ll likely to see a give-and-take between the U.S., the Democratic Unitary Platform (PUD), and the Maduro administration in the following months regarding the potential proposals for asset and liability management and small but equally significant steps for a restructuring, depending on the economic strategies of both the government and the opposition.