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Venezuela bonds ban: managers split on US sanctions impact

Venezuela bonds ban: managers split on US sanctions impact

As Venezuela grapples with an ongoing social and political crisis, managers are split on whether fresh sanctions by the US government will force president Nicolás Maduro to loosen his grip on the country and whether they'll hurt investors. 

In an effort to cut off funding for Maduro's government, which has been accused of human rights abuses and of diluting the country’s democracy, US president Donald Trump banned dealings in new debt and equity issued by Venezuela’s government and state-owned oil company Petróleos de Venezuela from August 24.

Trump also prohibited transactions of certain bonds owned by the country's public sector and dividend payments to the government.

In the view of Schroders co-head of emerging market debt Jim Barrineau, the measure could increase the chances of a default because they give Maduro a 'convenient excuse' to stop meeting debt payments.

On the other hand, Invesco portfolio manager Sean Newman said the sanctions wouldn't precipitate a default because the Venezuelan government could always turn to other investors for money.

'I think the government will probably continue to seek alternatives methods of financing, whether it is securitizing other commodity type assets, whether it's gold or any other non-liquid forms of assets... with other sources whether they’re in China, or Russia or even with non-American entities, European entities,' said Newman, who holds Venezuelan debt in some of his institutional funds. 

In any case, the sanctions could make more Venezuela more reliant on investors from Russia and China while distancing it from the US, the two managers said. 

'That increases the risk of holding Venezuelan debt because China and Russia understand that they're the last gasp creditors for Venezuela, so they logically would demand very onerous terms or simply say "I'm not going to put good money after bad,"' said Barrineau, who sold off his exposure to Venezuelan debt in May. 

Secondary market woes

Although the measure primarily targets new issues, Barrineau, manager of Schroder's emerging market bond and emerging market corporate bond funds said it could also affect investors who bought Venezuelan bonds banking on a restructure.

'In a restructuring, [the government] would issue new bonds to replace the old ones so [with the new sanctions] you just can't participate.'

Getting out of the investment might also prove tricky, even though the sanctions provide a 30-day wind-down period, for positions in Venezuelan debt.

'Liquidity is going to dry up,' Barrineau said. 'The sell-side firms with Venezuela risk on their books are going to rethink making a market in Venezuelan debt because [they could] get stuck with it,' Barrineau said.

Amid Venezuela's long running crisis, news emerged in mid-August that Credit Suisse had banned its traders from dealing in certain Venezuelan bonds.

The move came roughly three months after Goldman Sachs and Nomura Securities came under fire for buying Venezuelan bonds that were seen as providing a financial lifeline to Maduro's controversial government.

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