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Venezuela Sacrifices Drinking Water to Pay Bondholders

By Corina Pons and Nathan Crooks
June 05, 2014 1:54 PM EDT 244 Comments
A demonstrator confronts the National Police during a protest against Venezuelan President Nicolas Maduro, in Caracas, on March 20, 2014.
Photographer: Federico Parra/AFP via Getty Images
A demonstrator confronts the National Police during a protest against Venezuelan President Nicolas Maduro, in Caracas, on March 20, 2014.

At a time when Venezuela’s record $25 billion in arrears to importers has its citizens waiting hours in line to buy drinking water and crossing borders in search of medicine, President Nicolas Maduro is using the nation’s dwindling supply of dollars to enrich bondholders.

Venezuela, which imports just about everything, and its state oil producer have paid $2.8 billion in interest to overseas creditors this year, according to Barclays Plc. Including debt principal, bondholder outlays will balloon to almost $10 billion by year-end, the London-based firm estimates.

By putting off the local companies responsible for supplying everything from diapers to cancer medications, Maduro can preserve access to debt markets and protect oil shipments that would be vulnerable to bondholder seizure, said Alejandro Arreaza, an analyst at Barclays. Even if that means fanning the world’s fastest inflation and inflaming protests over shortages that have left at least 42 people dead since February.

“The government’s priority is to pay the sovereign debt,” Alejandro Arreaza, an analyst at Barclays Plc, said in a telephone interview from New York.

Venezuela’s dollar-denominated notes have returned 13.2 percent this year, 1.7 times the 8 percent return seen in emerging markets this year tracked by JPMorgan Chase & Co.’s EMBIG Diversified Index.

Debt Payments

Maduro’s predecessor Hugo Chavez kept up payments to bondholders, allowing them to reap returns of 692 percent during his 14-year tenure. Venezuela’s benchmark notes due in 2027 rose 1.52 cent today at 1:27 p.m. in New York to 81.85 cents on the dollar. Yields on the securities have fallen 3.1 percentage points to 12 percent since anti-government protests broke out in Caracas on Feb. 12.

Venezuela’s Finance Ministry didn’t respond to e-mail messages sent yesterday seeking comment on the government’s debt-payment policies.

The extra yield investors demand to own Venezuelan bonds instead of U.S. Treasuries fell 27 basis points, or 0.27 percentage point, to 1,006 basis points today, according to JPMorgan’s EMBIG Diversified Index.

The country’s debt to private companies rose 9 percent to $25 billion in the first quarter, said Asdrubal Oliveros, director of Caracas-based Ecoanalitica. The amount now exceeds the country’s $22.5 billion of foreign reserves.

PDVSA Debt

State oil company Petroleos de Venezuela SA is seeking a loan to pay off $3 billion of debt that matures this year and isn’t planning additional dollar bond sales in 2014, a company official said yesterday. PDVSA, as the Caracas-based company is known, is working to refinance an additional $11.9 billion of dollar debt due through 2017 to bring its annual maturities to no more than $3 billion, said the official, who asked not to be identified because he isn’t authorized to speak publicly.

Economy Vice President Rafael Ramirez said May 30 the government had approved payments of $1.2 billion to small companies for debts in 2012 and 2013, $486 million to airlines, $320 million for large food companies and $123 million for telephone operators. Airlines are owed about $4 billion, according to the International Air Transport Association.

“Venezuela doesn’t have debt with anyone,” Ramirez said. “What we have are pending foreign-exchange liquidations, which we are reviewing.”

‘Critical Level’

Those companies are unlikely to resume normal import levels until past debts are paid, Ecoanalitica’s Oliveros said.

“It’s the first time that it’s ever reached this critical level,” he said by telephone. “And it’s clear that they can’t pay it off at once.”

Consumer prices soared 59 percent in the year through March after the government carried out the biggest devaluation since currency controls were instituted in 2003, with the introduction of the Sicad II system that sells dollars for about 50 bolivars, compared with the official rate of 6.3.

The central bank hasn’t released readings for April or provided data on product scarcity since January, when it said 28 percent of basic goods were out of stock at any given time.

Barclays maintains an overweight call on Venezuelan debt because the government still has a window of about three months to improve the supply of dollars to the economy by allowing oil companies to sell hard currency into the country’s Sicad II market, according to Arreaza.

Default Outlook

The risk of default is very low because of the country’s “manageable” debt service in the short term, he said.

“There has been a divergence between what happens to Venezuelan bonds in the international market and what happens to businesses that operate inside of Venezuela,” said Francisco Ghersi, a managing director at Knossos Asset Management, which has all of its money invested in Venezuelan debt.

Ghersi’s Knossos Multi-Strategy Segregated Portfolio Fund has returned about 30 percent since inception in June 2011. Ghersi and his partner Carmelo Haddad say living in one of the world’s most violent cities helps them manage risks that fund managers in New York and London don’t see.

Ghersi said he had to swerve his motorcycle around road blocks, tear gas and national guardsmen on the way to work during the anti-government protests in February.

“The market is giving Venezuela the benefit of the doubt and hopes that it applies other economic measures that in one form or another will guarantee its capacity to repay bondholders,” Ghersi said.

To contact the reporter on this story: Nathan Crooks in Caracas at ncrooks@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Dennis Fitzgerald

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