Venezuela Bonds Have More Upside On Regime Change

presidents sort of. The current president of the person who has been in charge, Nicholas Maduro, has come under a president of pressure. We have a new thirty five year old who declared himself the rightful president of the nation in front of the National Assembly's thirty five years old. He is uh Guido, who is actually represent was actually supported by President Trump and a host of other nations.

Joining us down to talk about this. Eric Fine, portfolio manager focusing on the emerging markets fixed income strategy at Vannet Global in New York, joining us here in our interactive broker studios. Eric, thank you so much for being here. Why is this different than previous bouts of turmoil and unrest in Venezuela? Yep, great, great, question um number one, a new president was sworn in the That was the

event um number two. Of a range of countries in the hemisphere UH recognized him as a new president, including the U S which is important because it has sticks um everything from UH the you know, an extreme version would be military action or freezing or diverting control of assets let's say Petavesa or certainly Sitco, which is in

the US, the refineries in the US. Another one is another important thing to notice that violence was relatively low compared to the last big protests in indicating um reluctance on the possibly indicating reluctance on the part of security forces to to you know, confront the population UM. And similarly, when Maduro gave his speech at the presidential palace UM there were not a lot of the not a lot

of key high command officials standing next to him. Normally, when the president would say there's UH, there's a coup attempt, you would expect not just the defense minister to issue a Twitter statement, You'd expect a lot of the high command to do it as well. So I'd say those are the key those are the key developments. But the most important a new president was sworn in and a number of key countries recognized him. So I thought that was critical that the fact that you know, recognized so

quickly by many countries three minutes afterwards exactly. So, um, what are the next steps that investors should be looking forward to see which way this thing could go? I, Uh, it's very dynamic, So it's hard to say. There's a strong temptation to say it's binary. Either the opposition wins and Maduro's out, or Maduro's out, or more remains and muddles through for another few months, and in which case, you know, we'll just keep talking about it and we'll

see then. Um, I would say there might be and I'd say that those are two serious scenarios. Um, But there's a third scenario in which the military fractures. A lot of a lot of the powerful folks in the military are on sanctions lists with the US, and so an amnesty domestically isn't going to really mean much to them. They the temptation for them is to dig in their heels.

So I'd say there is that risky scenario of the military breaking up in the fractions, But I basically look for disaffection within the military disaffection between the military and the government. Um U. S actions can do a lot of can can can really pressure things, um UM. But there is this other scenario of of of factionalization, which could you know, which means we'll have to keep talking

about it. So Venezuela is a really important country for the entire Latin American economy, given how much of an oil producer it is. It also is a very big obligor, right. I mean, it has seventy two billion dollars of debt, including a whole host of bonds that are default. Of the prices on those bonds surging on the hope that Nicholas Maduro will get kicked out of power and we'll get someone else in Guido in particular, How hopeful are you that this price rise in these bonds is legitimate?

I mean, are you are you going more heavily into Venezuela dead? So UM, we can only comment on where we were at the end of December, because we're in the middle of January, and at the end of December we did have an overweight exposure to Venezuela. UM and it was optionality was that this scenario was possible and if it happened, there was a lot of upside, and if it didn't happen, we were kind of already there.

UM and so UM, I think there there remains significant upside to the bonds, UM, but one needs to be sensitive and cautious about that scenario I mentioned. I think that's the risky scenario. UM. I would say that the upside for Venezuela is there are many reasons for it, but one is with the high you know, among the highest proven oil reserves in the world. That's the kind of situation where credit can turn around very very quickly with US and I m F support. Moreover, in a

by definition of friendly government. In this scenario, UM, you can get the key thing that I've seen defining good workouts, which is quick. Right. So I've been you know, I've been doing this for decades and I guess almost thirty years. The often, the most usually, the most important determinant of the value of a bond in a non performing situation is not the deal you get, it's how quickly it comes.

You should be discounting these things at high high rates, and if it happens quickly, the price should go up. Let's just talk though, for a second, about the toll that the Nicholas Maduro regime has had on this nation. I mean it's lost tremendous numbers of its people. Its population has been decimated. I mean, is oil enough to make its economy strong enough to legitimize its debtload and legitimize the pop in the in the bonds that we're seeing. Um, well,

I think that's I think that's complicated. Um um. As a stand on a standalone basis, you could so I would say a few things. UM. Number one, it's not just um um oil. It's economic management. UM. There have been subs there, A lot of spending was essentially through

subsidization of gasoline. Right you Famously you could pay a quarter to fill up your tank in a suburban um um and uh a quarter of US twenty five cents um worth of a bolivars um the absence of a floating exchange rate regime, which orthodox you know thinking would tell you is is reasonable or something towards that is reasonable. So it's not just the debt load. What I'd say about the debtload is there is going to be a renegotiation UM. And the renegotiation could create a lot of

room a lot more room. So Peta Vesa has more bonded debt UM and less hidden debt. Venezuela, the obl board called Venezuela has more hidden debt and and less UH is the opposite situation. And very importantly, a lot of this hidden debt is Chinese and Russian and how that gets treated, and China in particular has not participated in the sort of post Breton Woods, Paris Club London Cup structure. That's a longer discussion. We talked about it when I was here last I'm a but debt diplomacy

in UH was a big issue when I was last year. Actually, when you're asking me what happened and I'm f debt diplomacy and how China um, will you know the there's a caricature but lend money and then um when it doesn't get paid in the case of Shri Lunka, see support, right, That really is when you think about China and Russia. It's not just the US that has an interest here.

China and Russia have been supporting Maduro. They have an interest there that to me represents I would guess if I'm thinking about the bonds or just the risk assessment of that country a significant risk for a viable workout solution that you might be interested in. Yes, it's a it's a it's a big risk depending on the political

and policy scenario. And I'd say mostly the political scenario. Um, if you get one of these, if you get the what I think most people would say is the positive outcome of of of of the existing government leaving UM new government coming in led by Guido initially U S I M F announcing they're willing, willing to work with them. Um. Then um, I think, Uh, there's there's substantial further upside in the bonds, and I think we're gonna be looking at scenarios where where Russia and China get you know,

those obligations might be in a completely different queue. I think the things that will be in the front of the queue or in one type of Q will obviously be petavas in Venezuela bonds. Pharmaceutical obligations are an obvious one too. You want the company's back, so things like that. But China, Russia, it's about the future and are they're going to be a big part of the future of a Venezuela with that leadership. I doubt it, so the

incentives are low. Just thirty seconds here, I'm wondering if it's unfair to cast the US is support of Guido, the opposition leader, as yet another front of the US China battle. Absolutely, I would say not no, that, I would say, this is a domestic thing, and this is this is a domestic situation that's been festering for you could argue for over ten years, um and uh. The

governments around the world are responding to it um. However, because China and Russia are involved, it may offer other opportunities for US geostras rategy to flex itself in an area where China and Russia really at the end of the day, are aren't aren't really involved, or it's not a big part of their national interests, when it's obviously a more clear part of US national interests. Eric, Fine,

thank you so much for being with us. Really really wonderful insight on a day or we're actually starting to see some of the change come to fruition that people have been talking about in Venezuela. Market's kind of mixed here this morning, but I didn't notice, you know, just looking at my screen that year to date, the Russell two thousand is the best performer, up eight point three with us right now. To talk to us about what's going on a small capital is Dave Wilson, Bloomberg Stocks

Reporter and Paul. We're actually seeing gains in the smaller companies today, unlike they're larger piers. The Russell two thousand index, up four tenths of a percent, is even hired by one tenth of a percent at the moment. Now, the Russell's sharpest game belongs to the the Triumph Groove, whose ticker is t g I. The aircraft parts maker has risen almost twenty eight percent trying for reach a deal to transfer a wing building business to Canada's Bombardier Invocare ticker

i VC has gained ten a half percent. The healthcare distributor received a by rating and new coverage that Needum and Brooks Automation ticker b r k S is up eight percent now. This company supplies chip production software and services, so it's part of a much bigger rally after results from the chip equipment maker LAMB Research, as well as

a chip companies Texas Instruments and zy Links. Now the Russell steepest drop belongs to Briggs and Stratton ticker b g g UH, the maker of Vengeance for lawnmowers and other equipment, is down almost sixty and a half percent after posting an unexpected loss for the physical second quarter, and Wave Life Sciences ticker w V has fallen. The drug developer is raising a hundred fifty million dollars to

a share sale equivalent to a twelve percent stake. Dave Wilson, Bloomberg Stocks editor and a columnist as well as contributor to Bloomberg Television and Radio, thank you so much for being with us. I gotta say, Paul. One as a class that has remained very confusing to me over the past few weeks is oil. There's just so many conflicting issues here. On one hand, it's sort of a proxy for global growth and where people think it's going. On

the other hand, it's a supplied demand picture. And to sort of pass us all out, UH, to give us a sense of where some of the oil executives are thinking things might be going, let's bring in Javier Blass, who is on site at Davos. He has our chief energy correspondent for Bloomberg, so have here right now. We're kind of going sideways. Actually looking at Brent. Uh, that's actually a little down on the day. I'm just wondering what the tone is among the oil executives and others

that you're speaking with at Davos. The tone is positive for oil prices. At the executives think that the market is slowly tightening because Opec, I'm particularly the RABA are cutting production and they're cutting quite aggressively. But there are so many head winds. One is that OPEC was producing a lot at the end of last year. The other one is uncertainty around the global economy and also China.

And the third one is that the US production, particularly in Texas and other places including Oklahoma and North Dakota, continues to be very strong and that is putting a cap on prices. Add to that, Iran and Venezuela and everyone here is positive but rather confused or where is gonna be the next leg for oil prices? Well have here you mentioned Venezuela and that country now has the benefit of the guess of two presidents um so obviously

political instability in that very important important oil market. With you know, Venezuela. I was surprised to learn just recently in one of the largest oil reserves is held by Venezuela. What are you hearing over there as it relates to the political issue at Venezuela, what that might do to the future of oil markets well too. Things over the short term, everyone is concerned this could be a bullish

factor for two reasons. One is that the White House is considering, but has not taken yet action about imposing oil sanctions on Venezuela that will be restricting or or including including banning the importation of Venezuelan and crude oil into the United States. Remember, Venezuela is the third largest source of crude oil for include oil for the US. That would be very bullish on the short term. Or it could be a situation of civil undras in the country,

and again that will be bullish. Production could fall. But over the long term, if we have a transition or political transition, things could turn quite rather barries for oil prices. Because Venezuela, as you said, has a lot of oil reserves, the coal start increasing production. Remember, in the late ninety nineties, Venezuela was pumping around three point five million bottles a day. It barely does one million today. So it has the

capacity to increase production quite significantly. How much for that lower prices given the fact that we have oil productions out of the US at record highs and climbing to new records every month. Well, that's one of the that's the biggest cup factor. I was talking only a few hours ago with a market don and he's the CEO of Mercuria, one of the world's largest oil traders, and he was telling me that he thinks that prices are going to go a bit higher, potentially sixty five maybe

seventy dollars a barrel. But beyond there, he said, then you really trigger the big machine of the Permian in West Texas. You get another lack of increasing production from the US and then prices go down and OPEC is

in trouble. So for OPEC, the sweet spot will be to try to keep prices around sixty seventy dollars a barrel, which is good enough for them, potentially not as high as they will like Brent, right, I'm talking about oil which currently but but that that will that will mean that that they keep in check a U S production. As you say, it's increasing, it goes up every week. We're close to twelve million barrels a day, and we're probably gonna add another million million point two barrels a

day uh in two thousand and nineteen. And let's not forget last year in two thousand and eighteen, production increased by two million bars a day. That was the largest increase on an annual base in the United States in a hundred years. So just real quickly, have you what are you hearing over there? And doubles about Russia? They seemed to be a wild card? Is a wild card? Is a world card? In different factors? One is what is gonna what is gonna happen with the collaboration between

OPEK and Russia. The Russians are are starting to sound like, um, they're not that happy with the production cards. So that's one wild car. Second world card on Russia. What is gonna be Russia doing versus Iran and Syria. Third one Venezuela Russia. Moscow has come supporting Nicolas Maduro today, so that's gonna be also another big factor for the old market. Have your blass, thank you very much? How areas? The

chief energy correspanner for Bloomberg News called in from Davos Switzerland. Well, investors in the Walt Disney Company and Compcast, they know very well that one of the best businesses in those big media companies is their theme park business. Theme park business, you know, we see a quarter after quarter, year after year double ditchit profit growth, and as a result, big companies like Disney and Comcast continue to ramp up their

investment in their parks and resorts business. One of our next guest is certainly one of the beneficiaries of that increase investment in the in the theme park and an attractions business. That is Mike Conson. He is CEO of pg A V Destinations Companies based in St. Louis. But Mike is in here with in New York with our Bloomberg Interactive Broker Studio. So, Mike, thanks so much for being here. Can you just give us and our listeners just a quick snapshot of what you do and how

you play in the theme park business. Well, sure, thank you for having me. So. We started in the theme park business back in the late sixties and we were involved in the development of some of the early theme parks in the United States like Bush Gardens and Williamsburg and got our got our sense of roller coasters and entertainment and and how these parks operate in function. And since that time, we've been fortunate to see that continue,

not just in the United States and grow around the world. So, given the progress in both designing these a roller coasters as well as executing them, are there any roller coasters that you would just not go on? Well, you know, I like them all, but this is a danger perspective. Yeah, yeah, you know. You you can go to some of the historic theme parks in Europe where they have wooden roller coasters actually have a brakeman who actually pulls a lever

to stop the coaster with and then break it. So I always wondered what happens if something happens to the brakeman, you know. So those are those are those cross the line for me? Those are a little scary. So, Mike, we've seen you know, if you think about the theme park business, obviously in the United States, you think about Disney and Orlando and in l A. But you know, the investment that we're seeing and these companies are making

outside of the US is just you know, staggering. I know, for example, Disney spent five billion dollars on its Shanghai resort. What are you seeing kind of globally in demand for some of these properties. Well, it's extraordinary. And if you had asked me ten years ago, could I predict this kind of growth? I don't think anyone really could have foreseen it. And I think there are a lot of

forces in play. Obviously, Uh, the brands, the intellectual properties associated with these entities are huge, and they're being consumed globally now. So you know, this is a major brands touch point for so many of the consumers in places like China and the Middle East and so forth. We see countries in places like the Middle East who are trying to shift from a petro based economy to entertainment

and tourism. And we've been involved in some of these projects, and one of the things that's interesting about those is that those our tantamount to building a new national identity. You know, think of the UAE as a destination, not as a place of oil wealth. I love that Paul is interested in, you know, how businesses are expanding into theme parks and I'm just wondering, are my children going to die on these things? And I'm wondering, you know, there's a rumor. I remember a sort of old wives

tale that crazy people design these. Uh is that true that they sort of get mad men to go in there and imagine the craziest pattern and then they create that recreate that. You know, you'd be surprised. I mean, there is a crazy aspect to it, right, But but we're working with some of the most precise Swiss engineers in the world who are calculating g forces that your

children would experience on the ride. And it is they know so much now about the physiological effects of rides that you know, what a person can tolerate and what a broad range of people can tolerate. Right, So, um, they're very precise about all this, so don't worry. And how much is sort of an average cause to how much can people charged for one ride? Oh, I don't know. You know, most of them are packaged in the context

of large attractions like theme parks and so uh. But it is interesting that there are r a y on a new coaster in an existing theme park. You know, this thing is often pained for itself within a year or two. And that's remarkable. Yeah, it's it's just amazing. You know, when the Comcast Corporation bought NBC Universal. They kind of thought the theme park business, which is a throwaway business. They were buying the cable networks and the

studios and things like that. But they've since found that it is one of the best, consistent, most profitable businesses, uh they have. So, so, what are some of the cool projects you're either working on or have you've recently launched.

What are you guys doing well? Since we were talking about the global theme park industry, I would mention Ocean Kingdom, which was built in China before Disney Shanghai opened, and until Disney Shanghai opened, I would say it was probably the best, arguably the best theme park in China, built near Hong Kong and Macau. And in fact, one of the big plans for that park was that the Hong

Kong to chew Hi Bridge would open. It's the largest, the longest oversea bridge in the world, so it's fifty two kilometers, So now you can go directly from Hong Kong to this park and and without a necessarily even having a Chinese visa, so that that that project is now hosting about ten million visitors a year. So I'm wondering you know, we hear a lot about the experience

and how important it is. I'm wondering, can you imagine a Macy's roller coaster and orders from roller coaster at will point to two retailers and malls get into it. You know, it's interesting. I think that I think that

there's a lot of room for growth. I mean, I think that the new wave of intellectual properties that we see connected to theme park and roller coaster experiences are video games for instance, you know, highly immersive story based experiences that that are very visceral, right, so it translates beautifully into something like a like a ride. Um. But yeah, I think I think that more consumer brands will find

their way into this into this area as well. And what are some of the technologies that are driving And you said, you've you know, you've got some of these amazing world class and engineers. I would think, you know, consumers they you know, just I would guess their demands are always going up in the Millennials want this wonderful experience. What are some of the new technologies that you think

you're going to be important going forward? Well, I think I think the integration of story and media is going

to change continue to change this. Obviously with you know, the Harry Potter project down in Orlando for the Universal, they went into new avenues of exploration of how you how you take a coaster which is a moving experience and yet you have it makes sense visually and you know, cognitively to to a visitor flying through some environment and the story is still powerful and apparent to you know, the hippogriff is chasing you or whatever whatever it is. But I think that you know, we we we put

VR glasses on people. You know, you've done all of this sort of thing. That's so cool. So what's been your favorite project to work on? You know, I don't choose between my children right now. I think I think that that, uh, there are a lot of good ones. I think some of them are not theme park based. Okay,

So so I love the American Space program. So we did a project called Space Shuttle Atlantis at Kennedy Space Center, which celebrated the completion of the Space Shuttle program and and is now you know, hosting a couple of million people a year there. And it's not the biggest thing we've ever done, about a hundred million, but it's but it's very powerful, and it replicates the experience of launching

into space. It does, and it also has the actual space shuttle Space Shuttle Atlantis, which went into space thirty three times and fortunately came back so we can put it in a museum. That's so cool. How many times in a row can you go on a I don't know. It's again. We had a lot of fun in the early days, you know that was that was a lot of fun. But that my kids love it. And I tell you that the team park business is a fantastic business and the millennials love the experience absolutely. Mike cons

and thank you so much for being with us. My Consint a chief executive officer of p G a V Destinations based in St. Louis, joining us here in our Bloomberg Interactive Brokers studios. I gotta say I can't go on roller coasters the way I used to, but they always look amazing. And I will say Coney Island is a lot of fun too. On the phone with us to discuss what's going on in the US airline businesses

George Ferguson. George is a senior aerospace, defense and airline analyst at Bloomberg Intelligence He comes to us from Bloomberg Intelligence headquarters in Princeton, New Jersey. So, George, thanks for being with us. And I know you're busy this morning with a lot of these earnings, resorts reports and pretty good numbers. So what are the highlights from your perspective? Yeah, I think the markets. Uh, well, first, good morning, thanks

for having on. Paul. Good good talk to you. Um. I think the excitement here is is a bit about American, which is showing capacity increases I think lower than we all expected. Um, They're a little more contained, and I think there's some hope in the industry that we could see less capacity come to the business over which would help fairs. Uh. You know, if we can get fairs to rise in this busines, we could probably improve profit

margins year over year. What about pricing power? Yeah, So what I told you was where I thought the excitement was coming from. Um, what I think is that there's still too much capacity coming to this market and that's going to really challenge pricing power. So American looked kind of contained in their discussions about capacity uh this morning. But we've got Delta and United, which you're adding. I think you know, United have like five percent in the

first quarter, Delta like four percent. We're still growing, They're still growing at rates above GDP growth, and so we think that's a negative for pricing power. Well, most people are are predicting, most airlines predicting guiding to sort of flat to hire uh you know, revenue per available seat mile or whatever metric they're using. I think there's still some some potential here for weekness. We could be flat

or even down. And I think another challenge we have out there is this him it shut down, and as it drags on, I think there's a risk that flyers won't want to be booking uh, you know, trips, they won't be going to the airport and managing potential risk with security. So I think one que especially, we could have some challenges from that as well. But I think pricing power is the big challenge. So what did the as you listen to the quarterly conference calls with management,

what are they saying about the shutdown? Are they in fact seeing any early signs to demand? Yes, so I'd say, you know, United in Delta came much earlier, so there wasn't a lot of commentary. We've just gotten through American now it's it's closing as we speak. UM, not a

lot of commentary on the government shutdown yet. I've seen some numbers thrown around the industry that maybe it's impacted revenues by a hundred or a hundred and fifty million dollars or you know, sort of a hundred million dollar levels. And we're talking about industry that's going to have probably thirty billion in revenues in one queue. So so far,

estimates are that it really hasn't impacted much. But remember, we've gone through one miss paycheck, um, and we're getting ready to come up to the second miss paycheck for T s A workers this Friday, and I think things get a bit more precarious after that about getting this people to strow up to work, and you know, clearing

security lines are having security lines flow smoothly. So, George, can you set us up taking a step back at the war between the older behemoths in the airline industry and the sort of newer upstarts that have catered to people who are looking for discount fairs Southwestern Jet Blue versus Delta an American, And I'm wondering how that's lighting up, And I'm I'm pitting these against each other because of the unions, because of the legacy workers and some of

the other issues that Delta an American have been pretty vocal about. Where are we on that? Yeah, I mean, so we expect it. We haven't gotten a full guide into some of those fast movers yet, but we've looked at the number of airplanes they're receiving and some of

their sc jeels guidance, and we really expect that. You know, the ones that will bring a lot of capacity to the market, the airlines and bring a lot of capacity will be Frontier, will be Spirit airlines, even Jet Blue is probably a bit a bit contained Southwest, those even

talking about five pc growth. So I think what you had here is you have these these ultra low costs which have absolutely the cheapest cost to deliver seats in the air continue to add large amounts of capacity because airplanes are relatively cheap, less lessers, least rates, and some of the newest airplanes are actually dropping right now. Um, so these airlines can go secure lift fairly cheaply, and

they're really expanding and looking for market share. And if you're Southwest, you just can't let that happen, uh more so than the Americans and the United's UM and the Deltas, which have more of a business component. But but so I think, you know, part of this drive is again those ultralow costs, which which can deliver seat miles cheaper, contuning continue to keep the heat on the industry, and

it's hurting. You know, it's hurting the Southwest. It's even hurting the Deltas, United's and Americans because of the back of their cabins are filled with flyers that are flying once or twice a year and are very, very price sensitive. And I think and see sort of get that get some relief from that aggressive expansion from those UH spirits and UH and Frontiers and allegiance, it's going to be hard to see pricing power come back to this industry. Let's look at the cost side of the equation a

little bit, George. We've got the crude oil down around fifty two a barrel. I'm guessing fuel has the relatively lower fuel costs have been a tail wind, so to speak, for the airlines. What are they saying about their outlook for fuel? Yeah, so you know we're hearing a lot of them give us uh, guidance for at least one queue and sort of the two two dollars and five cent range that's gonna look. It's gonna look a little bit lower than some of them paid last year, but

not a lot. So it's so it's not a lot of a pickup. You know. One of the perverse problems with that is that as fuel prices stay contained, older airplanes are more economical to fly, and so more people fly more of their equipment instead of retiring it because of uh, you know, because of an efficiency, and that sort of leads to a little more capacity in the industry. So it's it's kind of a double edged sword there.

So George, as you're talking, I just pulled up Google Flights since sort of thinking, all right, I want to check out some of these prices that are rock bottom. They're not that rock bottom. First of all, let's just put that out there. And then you also have a situation where you're paying for everything under the sun, from your coke can to the extra space that you have

to breathe right above your nose. I'm just wondering, do you expect an increase in those add ons that you have to pay for that we see as a common feature of the frontiers of the world, for example. So

I don't expect an increase. I expect that they'll continue the strategy that if you show up at the airport and you don't know whether or not you've got bags, you've got your bags on the flight, you'll find it that you probably haven't paid for the bags, and it's going to cost you a heck of a lot more at the airport than it will at you know, if you did it when you booked, So if you had any questions about whether you did have an extra fee,

the answer is yes. George Ferguson, we love having you on. Thank you so much. George Ferguson, Senior Aerospace, Defense and Airlines analyst for Bloomberg Intelligence. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woyit's I'm on Twitter at Lisa abram woits one

before the podcast. You can always catch us worldwide on Bloomberg Radio.