Venezuelan Bonds Fall as U.S. Trading Sanctions Loom

By Matt Wirz and Julie Wernau Features Dow Jones Newswires

Venezuelan bond prices tumbled Wednesday as traders grappled with the prospect that U.S. sanctions could restrict trading in the troubled South American nation's securities.

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The Trump administration is considering banning trading by U.S. banks of new debt issued by Venezuela or its state-owned entities, and possibly some existing debt, The Wall Street Journal reported on Wednesday. The move is aimed at weakening a government that Washington says has moved toward dictatorship, according to a senior administration official.

The U.S. Treasury has targeted foreign financial markets before. In 2014, it barred U.S. financial institutions from participating in new bond sales by Russia meant to raise money for the government, a move that had the effect of reducing the availability of dollar funding for the country.

But some moves under consideration are seen as extremely rare and could have unpredictable consequences. Investors couldn't recall a time when the Treasury prevented financial firms from trading debt among themselves in the so-called secondary market, a move the Journal reported the administration is considering.

That move would aim to hurt the government of President Nicolás Maduro and his associates who hold these bonds, but could also harm U.S. and other private investors who own Venezuelan debt, analysts said -- a factor officials have considered in the past when deciding which sanctions to implement.

"This would be a new step for Treasury and there would undoubtedly be collateral damage for U.S. institutional investors," said Tim Ash, senior sovereign bond analyst at BlueBay Asset Management, a U.K. investment firm.

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Prices for Venezuela's government bonds due 2027 dropped as much as 4% to 39 cents on the dollar on Wednesday, while bonds from the state-owned oil company Petróleos de Venezuela SA due this November fell as much as 2.1% to 88.5 cents. Both bonds recovered slightly by the end of trading.

Venezuelan bond prices have been under pressure in recent weeks as investors began to worry that the cash-starved government was edging closer to default. Some worried that tough U.S. sanctions could push it over the edge.

When the Trump administration announced on July 31 sanctions on Mr. Maduro but not, as many feared, on Venezuela's oil industry, many investors piled back into debt that offers double-digit yields.

News of another round of sanctions has raised the anxiety level around Venezuelan bonds again.

"I would not touch them with a 10-foot pole," said Diego Ferro, co-chief investment officer at Greylock Capital Management, referring to any new bonds issued by the Maduro government and certain other existing debt.

Goldman Sachs Group Inc. ran into criticism after its asset-management unit this year purchased $2.8 billion of debt held by the country's central bank at a deep discount. Venezuelans accused Goldman of raising fresh cash for Mr. Maduro.

Goldman has said it purchased them through an intermediary and didn't interact with the Venezuelan government directly.

The backlash from the trade has led some emerging-market bond analysts and traders to refer to such deals as "hunger bonds," for their support of a regime that has restricted the flow of food and medicine so drastically to pay its debts that its people are starving.

U.S. investors are barred from holding debt of countries like Syria and North Korea, which are subject to comprehensive sanctions from the U.S. that bar all trade, said Judith Lee, head of the international trade practice of law firm Gibson, Dunn & Crutcher.

Such blanket sanctions could be problematic in Venezuela because the country sells much of its oil to the U.S. and owns Citgo Holding Inc., which has refineries and pipelines in the U.S. The U.S. has never applied a more tailored sanction on trading bonds of a country not already under a comprehensive ban, Ms. Lee said.

Treasury considered implementing a similar blockade on trading of Russian government bonds after Moscow intervened militarily in Ukraine but dropped the idea to avoid hurting U.S. bondholders, according to a person familiar with the matter.

Instead, Treasury barred U.S. banks from underwriting any new bond sales for Russia. Moscow circumvented the measure by issuing new debt through Russian banks that ultimately sold the debt to international investors in secondary trades.

Freezing trade of Venezuelan bonds would hit many emerging-market investors, since the country comprises 1.55% of the benchmark emerging market bond index operated by J.P. Morgan Chase & Co. The index includes securities that meet minimum liquidity criteria. A spokeswoman for J.P. Morgan declined to comment on how a ban might affect Venezuela's role in the index.

Write to Matt Wirz at matthieu.wirz@wsj.com and Julie Wernau at Julie.Wernau@wsj.com

(END) Dow Jones Newswires

August 23, 2017 19:18 ET (23:18 GMT)