Bonds markets reacted swiftly to the "historical" announcement made byPresident Maduro on Thursday night, as prices converged to 25-30 cents onthe dollar across the curve (except the maturing PDVSA 2017s and partiallycollateralized PDVSA 2020s). Whether these prices represent a correct levelof recovery is another topic, but the swift convergence makes sense to us.    Specifically, President Maduro announced that Venezuela will seek a debtrestructuring / refinancing, but at the same time, perhaps contradicting with itsintention to restructure, it will pay it's debt obligations on the maturing PDVSA17s bonds. Following the announcement, PDVSA communicated that it hadtransferred the payment for the 17s. It is unclear if the past due coupons that aredue during the remainder of the year (about USD1.5bn in total) will be paid. Inour base case, they will be paid, although likely not on time (based on which webelieve the risk of a CDS trigger in the coming weeks is high).    In our view, this payment for the 17s is most likely the last principal paymentinvestors would see out of the Venezuela complex. We believe a decision has likelybeen made. The government may have come to the realization that the chance forit to muddle through 2018 financially is slim, and the political cost of an eventualdefault is now absorbable given lower social unrest and the decreased likelihoodof an electoral transition. Possible failure to obtain fresh money from bilateralsources could have played a role in the decision. It is also reasonable to assumethat potential bilateral sponsors would no longer like to see their funds be used forbond payments. It is not far-fetched to say that financial lifelines offered by Chinaand Russia over the past two years were among the main reasons for Venezuelato stay current on their debt payments so far. However, what really happenedbehind government's decision to make this announcement and what they reallyplan to do next remain unclear.    Then why does the government continue to make these payment if they reallyintend to restructure its debt? We can see three reasons. First, the transitionprocess of diverting oil shipments from the US to other parts of the world, whichhas been ongoing, is far from complete. Government would need more time to dig deeper into this process in order to shield its oil-related assets from potentialseizure or attachment, or from the negative impact of a potential oil embargo.    Second, the government is tinkering about moving presidential election forwardto March, and may want to avoid a default before that. Finally, if the governmentis genuinely looking for some debt relief from the investors through a workout(which we do not think will be feasible anyway due to sanctions and lack of faithon the government), they may want to avoid litigation risks during this period.    All signs point to the scenario of a "messy default", in which a credit eventoccurs under the current regime and could remain unremedied for a prolongedperiod of time. This scenario bodes poorly for recovery, hence the price actionson Friday. While these developments validate the defensive position we haverecommended recently (favoring bonds at the long end of the curve), we positionfor further equalization of bond prices. The risk of a CDS trigger is on the riseas past-due payments may see grace periods elapse. The government does notcare whether CDS is triggered or not, although it would not like to see bondsbeing accelerated, a risk that has also increased after this announcement. This isa watershed moment as far as Venezuela bonds are concerned. The market willfocus more on the recovery value and legal issues, as the long-feared "end game"has drawn near.

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