Confusion over Venezuela sanctions left many financial institutions scrambling last week - and in some cases banning trading altogether - as they worked to comply with the latest US prohibitions on the country’s debt.
Cantor Fitzgerald - and affiliates GFI and BGC Partners - halted the buying and selling of Venezuelan bonds, though it remains unclear if this is a temporary or permanent measure, one source told IFR. Cantor did not respond to requests for comment.
This was followed by the Depository Trust & Clearing Corporation, which stopped settlement on certain securities, only to reinstate service on 29 Venezuelan bonds later in the week, according to a source familiar with the matter.
Market participants were seen playing it safe, given the little time they had to fall in line with sanctions, which became effective on August 25 - the day they were announced.
The market initially found some relief when Washington opted for “Russia-style” restrictions that steered clear of an outright ban on secondary trading that had first been feared.
But Donald Trump’s executive order prohibiting trading in new debt and equity from the sovereign and PDVSA, as well as some existing bonds, puzzled many.
“It was a bit confusing and there was a negative reaction because people thought they wouldn’t be able to trade,” said one broker.
“I guess compliance is just wrapping its head around this, and being very careful before they allow trading of bonds in the secondary.”
The Treasury still allows transactions on a string of Venezuela bonds that are listed in the executive order.
The most notable exception are the Venezuela 2036s, which are thought to be held by state entities and could potentially be sold to raise funding.
Even so, big financial institutions have been careful about associating with the troubled country, which critics charge is sliding into a dictatorship and limiting vital imports to make bond payments.
Goldman Sachs was heavily criticized in June for buying US$2.8bn of PDVSA 2022s bonds - the so-called “hunger bonds” - even though the bank said it had done so through a third party and not with Venezuela directly.
Even before the recent sanctions, Credit Suisse had barred transactions involving the 2036s and 2022s, as well as Venezuelan securities issued after June 1, amid concern about reputational risks.
But “for banks that were active before the sanctions … it’s business as usual,” one investor said last week. “They have carved out the tricky bonds, and the rest continue to trade.”
Indeed, after a volatile session immediately following the imposition of sanctions, Venezuela debt was clawing back some losses last week.
PDVSA’s 9.75% 2035s were trading at 36.00 on Friday morning, down a point on the week but off the 34.403 low seen on Tuesday, according to MarketAxess.
PDVSA 8.5% 2020s, which are backed by shares of the company’s US unit Citgo, were also ending the week a good point lower at 74.00, but still considerably higher than the 71.40 quoted on Tuesday.
This came in a week that saw Fitch downgrade the sovereign to CC from CCC, citing a high likelihood of default given the country’s narrowing financing options following the sanctions.
“The expected reduction in the international reserve position in the context of sanctions will severely test the government’s capacity and willingness to continue with timely debt service,” Fitch said.
Gross international reserves stood at around US$9.8bn as of August, marking a US$1.2bn drop since the beginning of the year, Fitch said.
The country faces about US$3.7bn in amortization payments between now and the end of the year, particularly in October and November, and market players are divided over when or if a default could occur.
Analysts at Torino Capital think that the new sanctions may actually make a short-term default less likely.
Torino believes the new sanctions effectively make an orderly debt restructuring next to impossible, as they prevent US investors from accepting new bonds in an exchange.
And under those circumstances, the government is likely to do all it can to make bond payments and avoid a messy default that could damage oil exports.
PDVSA’s 8.5% 2017s, which mature in November, appear to be trading up on that theory, with prices climbing from 71.5 on August 2 to hit 90.625 on Friday.
Others disagree, arguing that President Nicolas Maduro has consolidated power - and no longer has to fear that a default would bring down his government.
“For years I have been one of the most optimistic in terms of them paying - now I am not,” said Pablo Venturino of investment firm White-Bridge Capital.
“Before, you knew if they defaulted [that] Maduro was out - that was the assumption. But now it is not technically a democracy, and anything could happen.”