At what point does a country’s political situation become intolerable for bond investors?
That is the question facing holders of Venezuela’s debt as the nation’s descent into strife raises questions about investment ethics.
This week, Credit Suisse circulated a memo outlining a ban on trading in two Venezuelan bonds, reflecting growing unease about the reputational risks of being associated with a country under the increasingly autocratic government of Nicolás Maduro.
Venezuelan bond yields remain elevated and prices depressed after President Maduro staged a power grab last week, pressing ahead with the formation of a constituent assembly that will rewrite the country’s constitution after a widely discredited election.
In response to Mr Maduro’s obduracy and the jailing of opposition politicians Leopoldo López and Antonio Ledezma the US has imposed fresh sanctions on several Venezuelan officials. For now Donald Trump has held off on taking action against the country’s oil sales, Venezuela’s main source of foreign currency.
Caracas’ debt has emerged as a flashpoint in the crisis. The purchase of $2.8bn worth of Venezuelan bonds from the state oil company, PDVSA, by the asset management arm of Goldman Sachs earlier this year attracted heavy criticism from the country’s opposition arguing that they constituted “hunger bonds” that help support the autocratic government.
Now Credit Suisse has banned trading in a sovereign issue due in 2036 and PDVSA’s bond maturing in 2022 — the issue purchased by GSAM. The bank said it would also prohibit trading in any bonds issued after June 1 from any Venezuelan entity.
The Swiss bank says it “does not want to be involved in any transaction or action which could be perceived as enabling the current Venezuelan regime to continue to violate the Venezuelan people’s human rights”.
Yet some investors have proved defiant in the face of criticism. “There are no heroes in emerging markets,” says one EM specialist who did not want to be named. “If I buy Turkey’s bonds, why wouldn’t I buy Venezuela’s? As long as there’s value there and I believe they are going to repay their debts.”
Venezuela has maintained a clean sheet in the eyes of its investors by prioritising debt repayments despite the humanitarian consequences of its severe budget squeeze.
“The Maduro regime has showed a very high willingness to pay,” says Shahzad Hasan, a portfolio manager at Allianz GI who holds Venezuelan bonds.
Although to many political campaigners the country’s willingness to fork out interest payments to holders of its paper while its people starve seems immoral, some market analysts cite sound commercial reasons for its actions.
Any default on debt repayments would result in the withdrawal of credit lines to the state oil company PDVSA, “which would result in a collapse in oil exports” and the loss of the country’s source of foreign currency, says Jan Dehn, head of research at emerging markets specialist Ashmore Group.
As a result “continuing debt service looks like the most likely outcome”, he says. “This should be OK for bondholders.”
Mr Hasan agrees: “A default this year is not my base case scenario.”
But as banks and some investors think twice about Venezuelan paper, that could hinder Mr Maduro’s hopes of raising fresh debt — something he probably needs to do. In October and November the country will face $3.7bn of repayments.
Venezuela could finance this through its dwindling reserves — it has less than $10bn left— but Mr Maduro has suggested he may instead seek to tap the market.
While the new constituent assembly gives Mr Maduro more power to issue new debt, its dubious legality is likely to add to the “hunger bonds” controversy in deterring some international investors from participating in any bond sales he may attempt.
Former Venezuelan minister and Harvard economics professor Ricardo Hausmann this week warned potential investors to steer clear, after 12 other nations from across the Americas teamed up to refuse to recognise the assembly.
Their declaration “makes it clear that whoever finances this government will possess odious debt”, Mr Hausmann tweeted.
And it is a message that some paper-holders are hearing loud and clear.
“After what happened with the hunger bonds I don’t think most investors would want to get involved” with fresh debt sales, says Mr Hasan, who plays down the likelihood of buying any new issuance himself. “The primary market is to all intents and purposes closed to them at the moment.”
He characterises Venezuela as “10 out of 10” on his investment risk scale, and says he is likely to exit his position if, as threatened, the US tightens sanctions further.
Every bondholder trying to shed his position needs a buyer, however — and one group of investors, at least, is proving keen on Venezuela. Distressed debt specialists are moving in, replacing the emerging markets funds for whom the risk levels are becoming a little too rich.
As Venezuela’s political crisis ratchets up, some emerging market bondholders are deciding “that the due diligence and monitoring needed to keep up to date with the risks are excessive”, says Anders Faergemann, a senior portfolio manager at PineBridge Investments.
This is particularly the case because Venezuela makes up less than 2 per cent of the leading benchmark indices which many investors track, according to Mr Faergemann.
“Instead we’re seeing distressed debt funds coming in,” he says. “That is proving supportive of the pricing.”
Additional reporting by Robin Wigglewsworth and Eric Platt
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