Morgan Stanley: Venezuelan Bonds Could Rise Up to 16% Due to Oil Recovery
Morgan Stanley believes that Venezuelan and Petróleos de Venezuela S.A. (PDVSA) bonds could see further increases after a significant rally on Tuesday, May 5th, following the issuance of General License No. 58 by the Office of Foreign Assets Control (OFAC), which authorizes legal and financial services related to a potential restructuring of Venezuelan and PDVSA debt. This potential upside comes amid expectations of oil recovery, progress towards eventual debt restructuring, and a gradual shift in the U.S. stance towards the country. The investment bank estimated, in a note, that PDVSA bonds could increase by up to 16%, while Venezuelan sovereign bonds could see an additional margin of around 9%. The bank's view follows the titles' positive reaction to the license granted by the Treasury Department. "It is another positive signal after the IMF's recognition that Venezuela's normalization is advancing rapidly and that debt resolution is part of U.S. policy," said Simon Weaver, an analyst at Morgan Stanley. Bonds still offer growth potential in a scenario of rapid oil price increases. However, the bank's focus is not solely on the U.S. measure but on what this decision reflects about the broader process of financial and political normalization around Venezuela. Morgan Stanley maintains that the market is beginning to price in a scenario where the country could gradually move towards an orderly renegotiation of its defaulted debt, further supported by a potential increase in oil revenues. This point is key because Venezuela's future payment capacity depends mainly on the recovery of crude oil production. For Morgan Stanley, the market may still be underestimating how much value bonds could recover if the oil industry manages to accelerate its recovery in the coming years. The firm explained that its estimates use a long-term oil price of US$70 per barrel, although they acknowledge that the current environment could justify higher prices. This would open up space for greater cash flows and, consequently, better payment conditions in a future restructuring. Additionally, the bank pointed out that its valuation does not incorporate additional value recovery instruments, mechanisms often used in sovereign debt exchange processes that could further increase returns for creditors. The market's reaction shows that investors have already begun adjusting positions in anticipation of this possibility. After the OFAC license was issued, Venezuelan sovereign bonds rose between 3 and 4 points, while PDVSA papers advanced between 2 and 3 points, although they are now retreating. Nevertheless, Morgan Stanley believes the movement has not fully exhausted the appreciation potential, especially in PDVSA debt. The entity maintains a relative preference for PDVSA bonds over Venezuelan sovereign bonds, arguing that both would likely receive similar treatment within an eventual restructuring, according to a Bloomberg note.
