Distressed-Debt Veteran Attracted to Venezuela's 9-Cent Bonds

A European distressed-debt trader is raising money to buy defaulted Venezuelan bonds trading below 10 cents on the dollar. This is amid signs of easing tensions between President Nicolas Maduro, the political opposition and the US.

Since Venezuelan politicians reached an agreement last month to restart talks on conditions for 2024 presidential elections, Claudio Zampa, the Switzerland-based founder and manager of Mangart Capital Management Ltd., said his Phoenix Recovery Fund has seen more interest and investment pledges. In response, the US has eased some restrictions on Chevron Corp to allow the oil producer to expand its operations in Venezuela.

Zampa, whose Phoenix fund is independent from Mangart, said in an interview that the current situation is the start of a normalization process that will eventually lead to a debt restructuring. He believes that recovery values are much higher than current prices.

Zampa, who has extensive experience with corporate restructurings in Argentina and Mozambique, believes that Venezuelan bonds could eventually be worth 50 cents. He is making a long-term bet on the country, believing that it will have to restructure its massive debt load at favorable terms.

Bondholders have been in the dark since payments were halted on some $60 billion of debt issued by the government and state oil producer PDVSA in late 2017. US sanctions imposed in 2019 aimed at hampering Maduro’s sources of financing also placed restrictions on US-based investors trying to trade the debt. While Maduro has repeatedly expressed willingness to engage with creditors, there are few signs that a resolution is around the corner.

Since Zampa launched the fund in March, it has seen inflows of about $10 million, which is enough to accumulate bonds with a face value of roughly $200 million. Zampa is looking to raise another $40 million.

Other investment funds have taken similar positions, hoping for a big payoff. Just days before the November agreement between Maduro and the opposition, bonds issued by Petroleos de Venezuela SA, known as PDVSA, were trading at very low prices. They have since increased in value, but are still far below face value.

Government bonds rose one cent, but remain below 9 cents. The uncertainty surrounding when and how the US will grant further sanctions relief is preventing prices from rising further, as a formal restructuring is nearly impossible under current conditions.

Venezuela's defaulted debt has accumulated almost $30 billion in interest, according to calculations from EMFI Group Ltd. This is a huge burden for the country, which is already struggling economically.

The recent agreement between Chevron and the Venezuelan government is a positive development for bondholders, according to Zampa. The deal allows Chevron to resume oil production and exports in Venezuela, and also collect on money owed by PDVSA. The Biden administration has given its blessing to the agreement, which is a positive sign for the future of US-Venezuela relations.

The development is a positive step for creditors, but US bondholders still cannot engage in debt talks with the Maduro administration or enforce their claims in US courts. "Investors are not currently being treated equally," he said.

Phoenix, based in the Cayman Islands, is not a litigation fund like some of its peers, Zampa says. It operates separately from Mangart. The fund doesn’t charge management fees, opting instead to take a cut of any gains upon redemption.

Zampa believes that investors may have to wait a while longer before seeing any significant returns. The next major event that could provide some clarity on the situation may be the elections, but Zampa says that it could be another three years before any real progress is made on the debt front. Even so, he believes that the wait will be worth it in the end.

"Venezuela bonds are like an option that never expires," he said. This means that investors can hold onto them indefinitely, and that they will always have the potential to generate a return.