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Venezuelan sovereign bonds and those of state-owned oil major PDVSA will regain their place on JPMorgan’s emerging market debt indices over a three-month-period beginning in April, after US sanctions on secondary trading were lifted in October.
The bonds will be included in the influential EMBI Global/Diversified benchmarks “over a three month phase-in period starting April 30th and ending June 28th”, JPMorgan said in a statement on Thursday.
“Twenty Venezuelan sovereign and quasi-sovereign bonds representing a total notional value of $53bn will be phased in pro-rata over the three month rebalance period.”
Venezuela was placed on an “Index Watch” by the firm in November after the Biden administration lifted sanctions on secondary debt markets that had been in place for nearly four years.
The decision means that the bonds are due to have a total estimated weight of 58 basis points in the EMBI Global Diversified index and 69bp in the EMBI Global index, JPMorgan said. Bonds had been weighted at zero since Washington in 2019 imposed sanctions on trading as well as the country’s oil and mining sectors.
Venezuelan bonds rallied in response, with prices up 3.5 cents, to about 21 cents in the dollar on Thursday afternoon.
The Biden administration announced in October that it would partially lift sanctions on Venezuela — including on its oil and mining sectors — for six months following the resumption of talks between the socialist government of President Nicolás Maduro and its US-backed opposition faction.
Continuation of that relief was conditional on Caracas taking steps towards holding “free and fair” elections in the second half of this year, the White House said at the time. Last month, Washington reimposed sanctions on state miner Minerven after Venezuelan courts upheld a ban on the candidacy of opposition leader María Corina Machado.
Juan González, senior director for the western hemisphere at the National Security Council, told reporters in Bogotá this month that while oil and mining sanctions relief was under review, lifting the trading ban was in the interest of the US.
“It’s fundamentally in the interest of the United States to make sure that you don’t have malign actors that are actually involved in the secondary market,” González said.
The re-inclusion on the JPMorgan indices does not mean the Opec country can access capital markets, with a ban on US investors buying any freshly issued Venezuelan debt still in place.
“Removal of sanctions and a very complex restructuring would be needed before this happens,” said Armando Armenta, emerging market strategist at AllianceBernstein. “The international community led by the US and the EU have made clear that free and fair elections are necessary conditions before the removal of sanctions.”
JPMorgan said on Thursday that if sanctions were reimposed on Venezuelan debt, “the index rules on market disruption events will be followed and the country will be removed from the index”.
Although the JPMorgan decision will open Venezuelan bonds again to so-called passive funds that buy according to indices, investors have said that the debt remains difficult to invest in because of the legal complexities brought by Venezuela’s divided politics.
Creditors have been hoping that a forthcoming auction of shares in Citgo, a PDVSA-owned refiner in the US, will help pay off some of the oil company’s defaulted debt.
But, illustrating the complexities, this week a US court ruled that Venezuelan law should determine the validity of the debt, which has been questioned by the opposition.
These PDVSA bonds were trading in the 70 basis points even ahead of JPMorgan’s index announcement on Thursday.
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