(Bloomberg) -- With political and social tension in Venezuela on the rise, investors should prepare for the “end game” by seeking out the country’s lowest-priced debt, according to Deutsche Bank AG.
The cheapest bonds -- which generally carry longer maturities -- will provide the best return in a scenario under which Venezuela defaults and is forced to restructure, Hongtao Jiang, a strategist at the bank, wrote in a report. Jiang said while he doesn’t expect Venezuela to stop payments this year, it’s a possibility that bond buyers need to be prepared for.
“Severe financing stress and increasing difficulty in raising fresh money have pushed Venezuela significantly closer to the edge,” Jiang said. “More and more investors have begun to engage with us recently in discussing potential restructuring scenarios.”
Four months of organized protests against President Nicolas Maduro’s administration have left almost 100 people dead, and demonstrations continue against the government’s plans to rewrite the constitution and give more power to the presidency. On Sunday, almost 7.2 million Venezuelans lined up for a symbolic vote of dissent. Foreign reserves have fallen to levels not seen in 15 years amid low oil prices and a collapse in the domestic economy.
Jiang recommends Venezuela government bonds due in 2025 and 2038, as well as notes from the state oil company that mature in 2020, 2027 and 2037.
A restructuring would likely entail a substantial haircut to the nominal amount and delayed repayment, but current investors won’t necessarily see a substantial loss except for the high-priced bonds with shorter maturities, Deutsche Bank said. The recovery value could be 43 cents on the dollar for sovereign debt and 35 cents for the oil company’s bonds.