Puzzling new sanctions for Venezuela's bondholders

Late Friday night, the US Treasury department gave US bondholders of Venezuelan government debt quite a shock.

Four days earlier, the Trump administration had slapped sanctions on Venezuela's state oil company, PDSVA, and forbidden US citizens from buying PDVSA-issued bonds. On Friday, the Treasury department extended those rules to Venezuela's sovereign bonds as well. Like the PDVSA bonds, US investors are still allowed to hold the country's debt and sell it to foreign counterparts.

It's a headscratcher for Venezuela's bondholders, the majority of which are US-based. To ensure compliance with the sanctions, banks have advised to halt all buying and selling of PDVSA bonds. The new rules effectively kill the secondary market for the country's sovereign bonds, undermining the ability of fund managers to offload their positions.

Fidelity, Pimco, BlackRock, AllianceBernstein, T. Rowe Price and Goldman Sachs Asset Management are among the most exposed.

Investors and lawyers have batted around a few ideas as to why exactly the US government is sucking liquidity out of those bonds and essentially "[imposing] a massive wealth loss for the holders of those instruments," as law professors Mitu Gulati and Mark Weidemaier put it in a new piece.

They say two explanations appear most plausible. Here's the first:

Cut Off Oxygen: Venezuela has made a habit of issuing bonds and then parking them in domestic financial institutions, for later sale when the government is low on cash. Counterparties have been willing to accept these bonds in the hope that a future government will pay, even if the current one won’t. Perhaps the U.S. government believes Venezuela still has a stockpile of these parked bonds and is trying to eliminate this last source of oxygen for the Maduro government.

And the second:

Don’t Want Irate Bondholders Calling and Yelling at US Treasury Officials: This explanation is a version of the first one (Oxygen denial) and says that the U.S. wants to dramatically reduce the value of Venezuelan bonds in the short run, but not to zero, so that U.S. holders who really need to exit will still have a small escape window.

Siobhan Morden at Nomura believes the US government may be trying to deter activist investors, who may be more interested in litigating rather than restructuring the debt, from further complicating what is already set to be one of the most complicated debt workouts ever.

The more conspiratorially-inclined have floated the idea that the coming restructuring will be so brutal that the US government is trying to offset the pain felt by US bondholders and give them the opportunity to pass it on to foreign investors.

Whatever the rationale, bondholders' fates rest in interim president Juan Guaidó's hands. Should the opposition triumph over authoritarian Nicolás Maduro, some more optimistic investors have told Alphaville they see recovery rates as high as 80 cents on the dollar. Failed regime change means more suffering ahead, chiefly for Venezuelans.

For the time being, befuddled US bondholders are just looking for some clarity from their own government. A big bondholder group advised by Mark Walker at Guggenheim Securities and law firm Cleary Gottlieb has reached out to the Treasury department and are waiting to hear back.

Related Links:
Bondholders brace for Venezuelan regime change - FT
Venezuelan bondholders, meet sanctions
- FT Alphaville
Goldman and BlackRock among winners as Venezuelan bonds surge
- FT

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