February 1, 2019
By Karin Strohecker
LONDON (Reuters) – JPMorgan retained dollar-denominated debt issued by Venezuela’s state-run oil company PDVSA in a key emerging market bond index in a monthly rebalancing.
Investors have been concerned that JPMorgan could exclude PDVSA from the EMBI Global benchmarks of sovereign and sub-sovereign emerging hard-currency debt after Washington imposed sweeping sanctions on the company on Monday.
“There is no immediate impact on the index status of Venezuela from the set of sanctions and licenses issued on 28 January 2019,” Kumaran Ram and Gloria Kim from JPMorgan’s index team wrote in a note to clients.
“Both Venezuela Republic and PDVSA bonds currently remain eligible for the flagship benchmarks: EMBI Global Diversified, EMBI Global, and EMBI+.”
However, a prolonged market disruption in liquidity and pricing would warrant a further review of the company’s index
status for potential removal, JPMorgan added.
While there were no explicit rules around sanctions for index membership, any entities finding themselves under such measures would likely be removed from benchmarks on the basis of liquidity, replicability and accessibility, Ram and Kim said.
PDVSA has a weight of 0.53 in JPMorgan’s EMBI Global Diversified index while Venezuela Republic bonds were at 0.66 as of earlier this week, according to the index provider.
Many asset managers welcomed the move to keep PDVSA in the key index, for now.
“They kept them in, there are no changes on PDVSA, and we are very happy about that,” said one asset manager who declined to be named. “(A change) would have come too quick, the situation is still evolving.”
Venezuela – the country with the largest oil reserves in the world – has defaulted on most of its $63 billion of debt as it has spiraled into its worst-ever economic crisis with hyperinflation forecast to reach 10 million percent this year.
Since the start of the year, bonds issued by Venezuela and PDVSA have chalked up steady gains amid weeks of protests that saw pressure mount on President Nicolas Maduro.
The debt rallied further after opposition leader Juan Guaido, who declared himself interim president on Jan. 23, received the backing of the United States along with most other countries in the western hemisphere.
However, trading in PDVSA bonds almost ground to a halt after Washington imposed a swathe of sanctions, including a ban on U.S. investors from trading in the secondary market, other than divestment.
“They were one of the best-performing bonds in January, and as a manager that is hard to overlook,” said Abhishek Kuma, head of emerging markets debt at State Street Global Advisors.
“Venezuela has defied all conventional wisdom for a very long time. As long as the bonds are there in the benchmark you have to consider buying them,” Kumar added.
PDVSA’s 2024 issue – previously one of the most heavily traded issues – was indicated at 0.8 cents weaker at 24.53 cents in the dollar. The 2025 sovereign bond showed at around 31.5 cents, according to Refinitiv data.
JPMorgan communicates any changes of index constituents to its clients on the last trading day of the month. The EMBI Global index includes $24.1 billion of dollar-denominated PDVSA debt, according to the index provider.
(Reporting by Karin Strohecker, editing by Sujata Rao and Susan Fenton)