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Venezuela looks to sell discounted $5B in bonds

CARACAS — Venezuela is attempting to resell at a deep discount
$5 billon of bonds it originally issued in December through a
Chinese brokerage as it struggles to squeeze through a
tightening cash crunch, according to investors who were offered
the bonds.

The move is the country’s latest extraordinary move to raise
funds after being shut out of the international debt market in
recent years as its oil-rich socialist economy crumbles. But
even bond funds that specialize in distressed debt are
hesitating to buy in because of concerns about the
irregularities surrounding the deal and questions from
opposition lawmakers about its legality.

While much of Wall Street sees default as a matter of time, the
offer could appeal to investors willing to take on the risk in
exchange for potentially significant returns. Goldman Sachs
Group Inc. recently paid $865 million for $2.8 billion in
Venezuelan bonds in a transaction that drew widespread
condemnation from rivals of embattled President Nicolas Maduro,
who accused the New York bank of helping finance his
increasingly authoritarian and isolated administration.

“It’s like they’re having a going-out-of-business sale,” said
Russ Dallen, partner at the brokerage Caracas Capital Markets.
“And that’s what buyers should be worried about. Either they’re
really desperate or they’re just filling up their credit card
with no plans of paying back.”

Haitong Securities USA, a unit of China’s Haitong Securities
Co. Ltd., in recent weeks has been marketing the distressed
debt to U.S. hedge-fund managers who specialize in buying
emerging-market bonds, the investors who were offered the bonds
said. Haitong had the title of underwriter when Venezuela
issued the bonds to a state-owned bank in December.

Unlike the bonds Goldman bought, the debt securities being
shopped by Haitong aren’t registered with the international
organizations that settle such transactions, meaning they
cannot be traded electronically, a risk that investors said was
keeping them from buying them.

Spokesmen at Venezuela’s finance and information ministries as
well as Haitong Securities didn’t respond to calls seeking
comment.

Reeling from nearly two decades of economic mismanagement,
Venezuela has had to resort to unorthodox financing methods
through small and often times little-known institutions as
large international banks veer away from Mr. Maduro’s
government.

Governments in the developing world typically plug funding gaps
by issuing bonds through Wall Street firms and European banks
that distribute the debt to bond-fund managers globally.

But Venezuela has lost access to that market in recent years.
The economy has shrunk by an estimated 27% since 2013. The
International Monetary Fund says inflation this year will hit
720%. Venezuela’s central bank has stopped publishing basic
economic indicators like balance of payments and gross domestic
product since September 2015, making the country’s capacity to
pay a big guessing game for investors and credit rating firms
alike.

Unable to tap debt markets, the government has turned to a
strategy of issuing bonds directly to state-controlled entities
that then try to resell the debt to foreign buyers for hard
currency at bargain-basement prices.

The bonds picked up by Goldman Sachs in May were sold for 31
cents on the dollar, via U.K. broker Dinosaur Group.

Haitong is offering the additional bonds, which fall due in
2036, at an even deeper discount, the fund managers said.

The 2036 bonds were issued in December by Venezuela’s
government in a private placement to state-run Banco de
Venezuela. At the time, the Finance Ministry had said the
securities were earmarked as IOUs to be distributed to food and
medicine importers that have ceased activity because Venezuela
owes them billions of dollars in arrears.

But Mr. Maduro’s political rivals also cried foul calling the
bonds illegal because they were never approved by the
opposition-controlled congress, also known as the National
Assembly, which is calling the debt invalid.

“They are liquidating the nation’s assets, indebting future
generations, ” said opposition lawmaker Angel Alvarado. Mr.
Alvarado, who is a member of the Venezuelan congressional
finance committee, said the legislature planned to debate the
bond sale in Tuesday’s legislative session.

Potential buyers fear that if Venezuela defaults, owners of the
2036 bonds wouldn’t have the same claim as other bondholders
because their bonds were issued at discount prices via an
intermediary, Banco de Venezuela. They are also hesitant to buy
the bonds because they haven’t been registered with Euroclear
or Depository Trust & Clearing Corp., the international
securities settlement organizations that institutional
investors use to trade electronically, one of the fund managers
said.

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