J.P Morgan will cut Venezuela's sovereign and state oil firm PDVSA's bonds to 'zero weight' in its widely-followed debt indexes over the next five months, the bank said on Tuesday, after US sanctions halted nearly all trading in them. The US investment bank's index arm said the phasing-out process would start on July 31 and be completed by Nov. 29, although technically the debt will remain part of the indexes and pricing will also be maintained for the time being.
Venezuela's weight in the EMBI Global Diversified, EMBI Global and EMBI+ indices is currently 0.5%, 0.9% and 1.2% respectively. As a result of weighting cut, J.P Morgan estimated the average yields on the EM indices would drop by some 45 basis points. It will now trigger forced selling of the bonds into what is already a largely frozen and illiquid market.
Trading in Venezuelan and PDVSA debt ground to a halt this year after Washington imposed sweeping sanctions on Venezuela in a bid to force President Nicolas Maduro and his allies from power. "Those funds who do have the bonds will have to sell," said Abhishek Kumar lead EM portfolio manager at State Street Global Advisors.
"You do not want to be holding an overweight position in a country that is not in the benchmark." He added it was likely to be a struggle as the sanctions mean they cannot be sold to US investors. "There is always a buyer at the right price, but it will definitely be a time consuming process," he said.
That expectation of forces selling has seen Venezuela's government bonds marked down to around 15 cents in the dollar from almost 30 cents early last month. PDVSA 2027 bonds are also trading at around 15 cents having been at 20 cents a month ago. Opposition leader Juan Guaido, who declared himself interim president on Jan. 23, has received the backing of the United States, along with most other countries in the western hemisphere.
J.P Morgan said it could open another index watch process in "the event of any favourable official guidance around easing of trading restrictions or consistent, observable improvements in liquidity and replicability of Venezuela bonds".
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