Venezuela default likely on bonds

NEW YORK: Venezuela is more likely to default on its sovereign bonds than on those of state-run oil company PDVSA given how essential the latter´s cash flow is to the country´s fortunes, bondholders and legal experts have said.

Both asset classes cratered last month after President Nicolas Maduro told creditors that Venezuela wanted to restructure its foreign debt, which includes some $60 billion in bonds issued by PDVSA and its owner, the Venezuelan government.

The oil Petroleos de Venezuela SA (PDVSA) produces is the country´s primary export and means of generating income.

A default by PDVSA could leave its assets outside the country, mainly its U.S. refiner Citgo Petroleum, vulnerable to seizure.

"If, on the one hand, the Venezuelan government is intent on doing everything it can to protect PDVSA’s assets and, on the other hand, the country does not have the resources to service the debt of the Republic as well, one could imagine them deciding to continue to service the PDVSA bonds and cease payment of the republic bonds," said Mark Walker, managing director and head of sovereign advisory at Millstein & Co.

That said, we really do not know what the government's strategy may be," said Walker, who has been in informal discussions with creditors about the next potential steps after Maduro´s call for a debt restructuring.

Eight different investors and legal experts contacted by Reuters in recent days agreed that the PDVSA bonds were a safer bet than the sovereigns.

The Venezuelan government may soon be running low on cash, forcing it to make some hard decisions. Its crude output dipped last month to the lowest level in nearly three decades, producer group OPEC said.