Venezuela has given itself a Christmas present in the form of a US$5bn international bond issuance, which was purchased at favourable rates by state-owned lenders – the Venezuelan Central Bank and the state-owned Banco de Venezuela.
Notes maturing in 2036 were sold in a private transaction on December 29, with Reuters reporting that China’s Haitong Securities acted as sole manager and France-based Global Emerging Markets Group advised on the deal.
The cash-strapped socialist economy has been teetering on the edge since the oil prices plummeted in 2014: skyrocketing foreign debt, soaring inflation and painful shortages of food and other basic products became major challenges for the Maduro administration.
Access to debt markets has also been limited, and with investment outlook bleak, Venezuela dug deeper into its FX reserves, which last year dropped from US$16bn to US$11bn.
Last October, PdVSA, the state oil giant, succeeded in the last-ditch attempt to secure a debt swap, extending US$2.8bn worth of maturities through generous pricing and offering 50.1% of US-based subsidiary Citgo as collateral.
On December 23, PdVSA used up its remaining share in Citgo to secure a US$1.5bn loan – reportedly, provided by its Russian counterpart Rosneft – leading to accusations from opposition parties that the government is selling off state assets.
As popular discontent rises, the current regime is running out of options. The latest issuance is expected to cover some of the liabilities – namely, open FX markets to local companies and unlock funds for the government to pay its creditors and suppliers.
But with few official details released about the bond sale and participants mostly refusing to comment on it, several aspects of the transaction raised concerns among analysts and investors.
The generous 6.5% coupon, sold at 100 cents to the dollar, is merely a fragment of the double-digit yields for Venezuela’s similar-aged debt – according to Bloomberg, the benchmark bond maturing in 2027 currently yields 20.7%.
More doubts were raised by the timing of the issue – in the final days of 2016 – which, many assumed, implied that the it had not been approved by the country’s National Assembly.
“On December 29 the government of Maduro contracted in an illegal manner a loan with a Chinese bank for $5bn,” lawmaker and political activist Jose Guerra tweeted on Monday.
Furthermore, the transaction, which was listed on Bloomberg’s bond trading system and on Cbonds (though it named Haitong Bank, Haitong International Securities’ investment banking subsidiary, as manager), did not seem to have been approved by any international clearing houses, which raised questions about its legitimacy.
Siobhan Morden, the Head of Fixed Income for Latin America at Nomura Securities, was also perplexed by the deal: “I don’t think they can leverage these bonds to anyone considering their de facto illegitimate status. So why issue something you can’t resell?”
But a banker close to the transaction, who preferred to remain anonymous, dismissed those concerns.
“The bond did not have to be registered at the National Assembly because it was part of the 2016 budget, which already had been approved. That also explains the rush to issue before the end of the year,” the source said.
“Keep in mind that while the bond has not yet passed a clearing house, the government intends to do so in the near future,” they added.
Another questionable element of the new issuance was the fact that, according to the filing, the bonds must be physically delivered. Some analysts saw this as a euphemism for bearer bonds – an outdated and largely phased out from international markets, as they tend to be used in money laundering cases and other shady transactions.
Here, too, the contact in the bank disagreed:
“The bond was issued in physical form, which does not mean it was a “bearer bond”. It was registered. The way it works is, even if you put it through DTC or Euroclear, it is still a physical bond – just in the name of DTC (or Euroclear). It is physical in the name of the buyer,” the source explained.
There has been much speculation about the motive behind this deal, with some experts drawing parallels with the previous debt sale in 2011, which were primarily acted as a currency instrument.
“This is a way to allow companies in the productive sector in Venezuela to access dollars,” the contact argued. “While there are no immediate FX funds coming in, eventually a company that, for example, imports food or medication, will be authorised to buy these bonds and resell them in the secondary market in exchange for dollars.”
Much like Guerre, various analysts noted that participation of a Chinese bank was a sign that the bond is simply a collateral in a loan extension agreement with China. Considering the multibillion debt Venezuela owes China, it would certainly not be in Chinese interests if the fellow socialist economy went under, they reasoned.
The contact involved in the deal conceded that once the notes reach the secondary market, they will likely end up in the hands of traders already invested in Venezuela, who will look to recompose the associated risks. However, the source downplayed the notion that some higher political play was behind the issuance.
“A lot has been made about China’s alleged involvement, but I don’t think there are any political overtones to this transaction,” the source noted. “It is just a bank in New York working with the public credit office in Venezuela to get the deal done – it was Haitung in this case, but really it could have been any bank. There is no “invisible Chinese hand” here.”
Most analysts agree that, if the deal is cleared, it will certainly provide some relief and much-needed dollars to the country’s productive sector. And if oil prices continue to rise, which Maduro is clearly betting on, the government may have a chance of digging the country with biggest oil reserves in the world from the financial hole it found itself in.
But with clearing house approval by no means guaranteed, many still remain sceptical.
“The bottom line is that the opposition has not endorsed the issuance, so there would be obvious legal risks - assuming that the Chavistas are not still in power in 2036,” Morden concluded.
