Venezuelan Bonds Fall as U.S. Trading Sanctions Loom
August 23 2017 - 7:33PM
Dow Jones News
By Matt Wirz and Julie Wernau
Venezuelan bond prices tumbled Wednesday as traders grappled
with the prospect that U.S. sanctions could restrict trading in the
troubled South American nation's securities.
The Trump administration is considering banning trading by U.S.
banks of new debt issued by Venezuela or its state-owned entities,
and possibly some existing debt, The Wall Street Journal reported
on Wednesday. The move is aimed at weakening a government that
Washington says has moved toward dictatorship, according to a
senior administration official.
The U.S. Treasury has targeted foreign financial markets before.
In 2014, it barred U.S. financial institutions from participating
in new bond sales by Russia meant to raise money for the
government, a move that had the effect of reducing the availability
of dollar funding for the country.
But some moves under consideration are seen as extremely rare
and could have unpredictable consequences. Investors couldn't
recall a time when the Treasury prevented financial firms from
trading debt among themselves in the so-called secondary market, a
move the Journal reported the administration is considering.
That move would aim to hurt the government of President Nicolás
Maduro and his associates who hold these bonds, but could also harm
U.S. and other private investors who own Venezuelan debt, analysts
said -- a factor officials have considered in the past when
deciding which sanctions to implement.
"This would be a new step for Treasury and there would
undoubtedly be collateral damage for U.S. institutional investors,"
said Tim Ash, senior sovereign bond analyst at BlueBay Asset
Management, a U.K. investment firm.
Prices for Venezuela's government bonds due 2027 dropped as much
as 4% to 39 cents on the dollar on Wednesday, while bonds from the
state-owned oil company Petróleos de Venezuela SA due this November
fell as much as 2.1% to 88.5 cents. Both bonds recovered slightly
by the end of trading.
Venezuelan bond prices have been under pressure in recent weeks
as investors began to worry that the cash-starved government was
edging closer to default. Some worried that tough U.S. sanctions
could push it over the edge.
When the Trump administration announced on July 31 sanctions on
Mr. Maduro but not, as many feared, on Venezuela's oil industry,
many investors piled back into debt that offers double-digit
yields.
News of another round of sanctions has raised the anxiety level
around Venezuelan bonds again.
"I would not touch them with a 10-foot pole," said Diego Ferro,
co-chief investment officer at Greylock Capital Management,
referring to any new bonds issued by the Maduro government and
certain other existing debt.
Goldman Sachs Group Inc. ran into criticism after its
asset-management unit this year purchased $2.8 billion of debt held
by the country's central bank at a deep discount. Venezuelans
accused Goldman of raising fresh cash for Mr. Maduro.
Goldman has said it purchased them through an intermediary and
didn't interact with the Venezuelan government directly.
The backlash from the trade has led some emerging-market bond
analysts and traders to refer to such deals as "hunger bonds," for
their support of a regime that has restricted the flow of food and
medicine so drastically to pay its debts that its people are
starving.
U.S. investors are barred from holding debt of countries like
Syria and North Korea, which are subject to comprehensive sanctions
from the U.S. that bar all trade, said Judith Lee, head of the
international trade practice of law firm Gibson, Dunn &
Crutcher.
Such blanket sanctions could be problematic in Venezuela because
the country sells much of its oil to the U.S. and owns Citgo
Holding Inc., which has refineries and pipelines in the U.S. The
U.S. has never applied a more tailored sanction on trading bonds of
a country not already under a comprehensive ban, Ms. Lee said.
Treasury considered implementing a similar blockade on trading
of Russian government bonds after Moscow intervened militarily in
Ukraine but dropped the idea to avoid hurting U.S. bondholders,
according to a person familiar with the matter.
Instead, Treasury barred U.S. banks from underwriting any new
bond sales for Russia. Moscow circumvented the measure by issuing
new debt through Russian banks that ultimately sold the debt to
international investors in secondary trades.
Freezing trade of Venezuelan bonds would hit many
emerging-market investors, since the country comprises 1.55% of the
benchmark emerging market bond index operated by J.P. Morgan Chase
& Co. The index includes securities that meet minimum liquidity
criteria. A spokeswoman for J.P. Morgan declined to comment on how
a ban might affect Venezuela's role in the index.
Write to Matt Wirz at matthieu.wirz@wsj.com and Julie Wernau at
Julie.Wernau@wsj.com
(END) Dow Jones Newswires
August 23, 2017 19:18 ET (23:18 GMT)
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