Alleged Drug Kingpin Leads Venezuela's Debt Restructuring Effort

By Anatoly Kurmanaev Features Dow Jones Newswires

CARACAS, Venezuela -- Meet the team in charge of the most complex bond restructuring in recent history: a former military officer, a one-time geography professor, two engineers, a minister under sanctions for alleged corruption and an alleged drug kingpin.

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As the country runs out of cash, Venezuelan President Nicolás Maduro last week appointed a six-man commission to negotiate a deal regarding up to $150 billion of the country's outstanding foreign debt. The composition of the commission -- none have significant training in economics or finance and two are targets of U.S. sanctions -- suggest to some observers that the government isn't really seeking to restructure its debt, but rather to create a situation in which it can blame a default on the sanctions.

Thin on debt-restructuring experience, at least some of the commissioners could pad out their CVs with long legal disclaimers instead. The commission's leader, Vice President Tareck El Aissami, is on Washington's drug kingpin list. Another member, Finance Minister Simón Zerpa, who has a degree in political science, is under U.S. sanctions for alleged corruption. Both have denied the allegations in the past.

A blanket end of payments by Mr. Maduro would trigger the biggest default in history. Untangling that mess would be complicated by the lack of collective agreement clauses on some securities, different issuing entities, and scuffles for repayment priority among the motley array of holders, including Goldman Sachs Asset Management and the Chinese government.

"Napoleon's invasion of Russia in 1812 was a large undertaking. Restructuring Venezuela's public-sector debt will be a very large undertaking," Lee Buchheit and Mitu Gulati, two of the world's most renowned sovereign-default lawyers, wrote in an academic paper in July.

The commission appears so ill-suited to the gargantuan task at hand that it raises doubts about Mr. Maduro's intentions, including whether he wants a deal at all, said Risa Grais-Targow, an analyst at risk consulting firm Eurasia Group.

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"It looks like political theater," she said. "They aren't being very earnest about negotiating."

In a televised address last week, Mr. El Aissami called on investors to discuss a restructuring at a meeting in Caracas on Nov. 13, which happens to be the deadline for almost $300 million in outstanding bond interest payments.

But since Mr. El Aissami is on the kingpins list, it is unlikely anyone will turn up at the meeting and risk breaking U.S. laws that prohibit business dealings with people officially classified as such. Indeed, those doing so could in theory face possible 30-year jail terms.

The Venezuelan government hasn't exactly been forthcoming about helping investors attend the proposed meeting. The only detail Mr. El Aissami gave was an email address for interested participants. Two fund managers at multi-billion investment firms say they have emailed asking for details but received no reply.

Another American investor said he received an initial reply asking him to register online, only to discover that the U.S. wasn't on the online form's drop-down list of countries.

"I put in France and have not heard back," he said.

A fourth fund manager said he was banned from even emailing by his firm's compliance department, for fear of breaking the U.S. ban on business dealings with Mr. El Aissami or Mr. Zerpa.

"We can't engage with them in any way," he said. "It's a very bizarre situation."

All of the investors spoke on condition of anonymity in order to not damage their firms' repayment odds in any default negotiations. Mr. El Aissami's office, as well as the information and finance ministries, didn't respond to requests for comment about the meeting.

Venezuela's government has yet to explain what the requisites are for attending the meeting, where it would take place or whether the government would provide accommodation and transport in one of the world's most violent cities. No guidance has been given for U.S. citizens, who require a visa to travel to Venezuela.

A senior central bank official said on Monday the government will opt for a videoconference with investors instead, but offered no details.

Many investors and financial analysts believe the hapless commission and the ill-planned meeting are just props to allow Mr. Maduro to blame the failure of negotiations to stem the default on U.S. sanctions.

"It's a waste of time," said one Latin America-based bond investor, who holds Venezuelan debt and is skipping the meeting. "This is just an exercise to lay the groundwork for a default and point to the sanctions as the culprit."

The track record of Venezuela's negotiating commission gives little hope for a successful deal with Wall Street, said Patrick Esteruelas, head of research at Emso Asset Management.

One member, Planning Minister Ricardo Menéndez, a former geography professor, has long advocated turning the country into an agglomeration of worker communes. Another, Agriculture Minister Wilmar Soltedo, a retired military officer, oversaw the collapse of food production in Venezuela's former breadbasket state of Portuguesa, which he governed.

State oil executives Nelson Martínez and Eulogio Del Pino have seen the country's oil output plummet by a third on their watch. While both have long interacted with financiers and international oil firms, they haven't been able to reverse the decline of foreign investment in the industry.

"They are clearly winging this," said Mr. Esteruelas. "They are approaching this issue with no know-how, no preparation and no clue."

Fund managers say their biggest concern in the commission is its head, Mr. El Aissami.

Born into a family of Lebanese and Syrian immigrants, he steadily rose up the ranks of the Socialist government to become Mr. Maduro's economic tsar.

U.S. officials and former colleagues say Mr. El Aissami accrued power by using proceeds from drug trafficking and illegal passport sales to build a parallel intelligence network to intimidate and repress opponents. Earlier this year, the U.S. government froze "hundreds of millions of dollars" in bank accounts linked to Mr. El Aissami, according to White House officials.

Mr. El Aissami has denied all accusations and has said the U.S. investigations are attempts to destabilize Venezuelan government.

"The government has entrusted this mission to its most radioactive member," said Mr. Esteruelas. "It's befuddling."

Write to Anatoly Kurmanaev at Anatoly.kurmanaev@wsj.com

(END) Dow Jones Newswires

November 10, 2017 07:14 ET (12:14 GMT)