The weight of Venezuela and PDVSA bonds will be phased to zero in the EMBIG indices over a five-month period beginning July 31, JP Morgan said on Tuesday.
The decision was in line with market expectations, which was expecting a middle-of-the-road solution since the bank announced it was putting the bonds under review on April 11.
“Venezuela is still in the index so that means that guys who are index holders aren’t forced to sell,” said Edwin Gutierrez, a portfolio manager with Aberdeen Asset Management.
“Granted, if you’re a guy who has to replicate the index, the index is now zero so you become a de facto seller. But this was their elegant compromise,” he added.
As of Monday, Venezuela’s weight was 0.5%, 0.9% and 1.2% in the bank’s EMBI Global Diversified, EMBI Global and EMBI+ indices respectively.
“At the end of this phase-down period, Venezuela Republic and PDVSA bonds will remain in the index composition, but no longer contribute to headline total return or analytics (since the bonds will have zero weight in the benchmark),” JP Morgan said in a report.
Mark-to-market index pricing will also continue, the bank said.
Official index pricing for the sovereign’s bonds during and after the phased reduction is completed will continue as long as the securities are included in the benchmark, added the report.
The EMBIGD spread is expected to compress by an estimated 45bp due to the re-weighting although total returns are not expected to be significantly impacted.
Due to the recalibration, countries like Mexico, Brazil and Argentina will go down in their weight percentage by November 29, when the reduction to zero concludes.
All three countries will see their weight in JP Morgan’s EMBIGD and EMBIG reduced by at least half a point.
The national oil-company PDVSA saw its bonds trading at around 15 cents in the dollar, Reuters reported.
“This option allows them to fulfill their responsibilities as an index provider, while still acknowledging the unique circumstances surrounding Venezuela,” said Patrick Estruelas, head of research at asset manager Emso.
POLITICAL UNCERTAINTY
US investors have been sidelined from trading their investments in the country since the Trump administration halted trading Venezuelan assets earlier this year.
The decision leaves those invested in the country, which defaulted on its debt in 2017, amid a vastly illiquid market.
Opposition leader Juan Guaido, who declared himself president in January, has been unsuccessful in his attempts to overthrow President Nicolas Maduro, who maintains control of the military.
Earlier this month, the US-backed Guaido outlined a debt restructuring plan via his advisors, should his administration take control of the country.
In handling the country’s $200bn debt load, advisors to Guaido outlined a plan to treat all creditors equally despite the different types of debt owed.
Venezuela’s bondholders committee answered on Tuesday by appealing to Guaido and the National Assembly to work on a debt negotiation framework.