Washington Essentially Kills The Venezuela PDVSA Bond Market

&l;p&g;&l;img class=&q;dam-image ap size-large wp-image-81d67a1c10914ca9ac03553c09175301&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/81d67a1c10914ca9ac03553c09175301/960×0.jpg?fit=scale&q; data-height=&q;639&q; data-width=&q;960&q;&g; Washington is hell bent on regime change in Venezuela. PDVSA can no longer bring in dollars from the U.S., its biggest market. (AP Photo/Alejandro Cegarra, File) photo credit: ASSOCIATED PRESS

Washington has put the brakes on the secondary market for PDVSA bonds.

The Treasury Department &l;a href=&q;https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl9b.pdf&q; target=&q;_blank&q;&g;issued an amendment&l;/a&g; to trade rules under the Venezuelan sanctions regime on Monday, listing all of the bonds and debt instruments majority owned by Venezuela&a;rsquo;s government or its quasi-sovereign oil firm PDVSA that are now essentially stuck in limbo. Any investor holding PDVSA or Venezuelan sovereign debt either has to sell it to a foreigner or hold on to it and hope for a better day.

The amendment makes it more of a legal challenge for the U.S. subsidiaries of PDVSA, including Citgo, to transfer funds out of the country.

Last week, Reuters reported that Venezuela had opened an account with Russia&a;rsquo;s Gazprombank in order to facilitate payments from blocked accounts. Gazprombank denied the report.

U.S. firms and individuals are allowed to engage in transactions that are ordinarily considered incidental and necessary in dealing with PDVSA and its subsidiaries here. They can also provide brokerage services or sell any debt by PDVSA issued before August 25, 2017 so long as the sale is to a non-U.S. person, absent authorization from the Office of Foreign Assets Control at Treasury.

&l;img class=&q;dam-image bloomberg size-large wp-image-43224801&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/43224801/960×0.jpg?fit=scale&q; data-height=&q;639&q; data-width=&q;960&q;&g; Steven Mnuchin, U.S. Treasury secretary, stands with National Security Advisor Mike Bolton on January 28. PDVSA crude oil receipts were locked up in the U.S. last week. Amendments to Treasury&a;rsquo;s latests sanctions were made on February 11 as Washington seeks to apply maximum pressure on the ruling Socialists United party. Photographer: Al Drago/Bloomberg photo credit: &a;copy; 2019 Bloomberg Finance LP

Companies and brokers can engage in transactions related to the receipt and processing of interest or principal payments, and acting as a custodian for U.S. and foreign holdings in PDVSA securities, including acting as a custodian for a foreigner or foreign entity after that person has received the PDVSA securities from an American in a divestment transaction.

In short, Washington is not allowing for Americans to trade in PDVSA bonds. And foreign firms, like European emerging market asset managers, are not allowed to trade them through an American brokerage firm. Anyone holding Venezuelan debt here in the U.S. is stuck with it.

Many hedge funds and some emerging-market bond fund managers benchmarked to the J.P. Morgan Emerging Bond Index have been buyers and holders of PDVSA debt. But now that the bond is illiquid, it calls into question whether or not Venezuela can still be part of the EMBI. Whether Wall Street fund managers still want to sit on this defaulted debt and hope for a recovery value in the 30s or 40s, or dump it to foreigners at, perhaps, even a steeper discount remains to be seen.

Many emerging-market debt managers believe that regime change is imminent in Venezuela. And that a new government would immediately restore the value in PDVSA bonds. Even a 50% haircut from par value on some issues would double the value of the sovereigns and quasi-sovereigns now in default.

Only the PDVSA 2020 is not in default at this time.

&l;img class=&q;dam-image bloomberg size-large wp-image-43251904&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/43251904/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Venezuela is bankrupt, poor and destitute beyond anyone&a;rsquo;s imagination. Hyperinflation and a baseless currency has Venezuela facing another year of economic depression. Photographer: Ivan Valencia/Bloomberg photo credit: &a;copy; 2019 Bloomberg Finance LP

&a;ldquo;Some people view regime change as helping PDVSA and were buying in the secondary. We wanted to do that, but sat it out. And now that trade is banned. Looks like we made the right call,&a;rdquo; says Katherine Renfrew, a fund manager for TIAA-CREF and the lead portfolio manager for the TIAA CREF emerging-market debt mutual fund (TEDNX).

&a;ldquo;We know the Venezuela story quite well,&a;rdquo; she says, noting that TIAA-CREF was on the fence about whether to buy PDVSA as a bet on the downfall of the ruling Socialists United Party. &a;ldquo;The way the U.S. is dealing with sanctions and individuals on the OFAC list just makes it a challenge to deal with Venezuela. I think you will keep seeing these modifications as developments occur,&a;rdquo; she said in a phone interview roughly 30 minutes before OFAC came out with its amendments from last week&a;rsquo;s ruling. &a;ldquo;We are happy to be on the sidelines, waiting for clarity.&a;rdquo;&l;/p&g;

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