Venezuelan Bonds Up After New U.S. Sanctions Spare Debt Trading

Bond investors expressed relief on Friday after new U.S. sanctions against Venezuela didn't ban trading of the country's existing bonds, an outcome that could have caused massive disruptions in the market for Venezuelan debt.

Venezuela government bonds due in 2034 gained 2.3% to 38.875 cents at midday Friday, according to Thomson Reuters. Prices of bonds from state-owned oil company Petróleos de Venezuela SA due on Nov. 2 were up 0.8% to 93 cents, following a 6% gain the day before, according to traders.

The U.S. sanctions announced on Friday include a number of new restrictions on Venezuelan debt, including prohibiting most new debt issues and banning bond trading between the Venezuelan government and any institution in the U.S.

But sanctions didn't include shutting down secondary market trading for existing Venezuelan bonds, a measure that Trump administration considered in recent days, The Wall Street Journal reported on Wednesday.

The sanctions are aimed at severely limiting the government's ability to finance itself, hoping to undermine President Nicolás Maduro's legitimacy among domestic supporters.

But many U.S. and other global investors holding Venezuelan debt worried that they also would have been harmed by any punitive measures that prevented the trading of these bonds.

Write to Carolyn Cui at carolyn.cui@wsj.com

Prices of bonds from state-owned oil company Petróleos de Venezuela SA due 2021 were up 2%, to 40.25 cents, while PdVSA bonds due on Nov. 2 were up 0.4%, to 93.4 cents, following a 6% gain the day before, according to traders.

While Venezuela hasn't issued public debt for years, the new sanctions include a number of restrictions intended to block the government's ability to finance itself, hoping to undermine President Nicolás Maduro's authoritarian regime.

Those include prohibiting most new debt issues and banning bond trading between the Venezuelan government and any institution in the U.S.

But the sanctions didn't include shutting down secondary market trading for existing Venezuelan debt. Prices of Venezuelan debt skidded earlier this week after The Wall Street Journal reported that the Trump administration was considering a ban on bond trading.

"This has no impact on the secondary market for Venezuelan bonds," said AJ Mediratta, president of Greylock Capital Management, a hedge fund specializing in distressed and high-yield emerging markets bonds.

Raymond Zucaro, chief investment officer at Florida-based RVX Asset Management LLC, said he took advantage of the selloff and bought more Venezuelan bonds, believing an outright ban is impractical.

"For all the lip service they talked about, it's sort of a lame step forward," he said.

Bonds rallied on Thursday after a local Venezuelan news report said that China is considering buying some discounted Venezuelan bonds through a joint fund of the two countries. Another news report said that Russia's oil company Rosneft may also be involved in a deal that would raises cash for the Venezuelan government.

Prices for the PdVSA bonds due in November rose to their highest levels in three years, according to MarketAxess BondTicker.

Still, some investors said that the ban on new issuance could begin to ripple through secondary-market trading. Bond investors would have to re-evaluate their Venezuelan holdings, taking into account the fact that there would be no channels for the government to access the capital markets.

"The U.S. government is closing the window on the ability for the Venezuelan government to raise new money; that's going to have negative repercussions on the value of the existing bonds," said Robert Abad, founder of the emerging markets advisory firm EM+BRACE.

Venezuela's position in J.P. Morgan Chase & Co.'s emerging-market bond index, which serves as a benchmark for the market, isn't likely to be affected by the sanctions. Debt in the index must meet minimum liquidity thresholds. Since there aren't sanctions on the secondary market, there aren't any anticipated liquidity issues for the trading of outstanding debt.

That news may have disappointed traders hoping that new bond-trading restrictions could turn some debtholders into forced sellers, creating new opportunities for hedge funds to pick up Venezuelan bonds on the cheap.

--Matt Wirz and Emily Glazer contributed to this article.

Write to Carolyn Cui at carolyn.cui@wsj.com

(END) Dow Jones Newswires

August 25, 2017 15:52 ET (19:52 GMT)