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  HOME | Venezuela (Click here for more Venezuela news)

Mysteriously, Venezuela Sells $5 Billion in Bonds to Itself

By Carlos Camacho

CARACAS -- The embattled government of Nicolas Maduro sold $5 billion in new debt bonds to itself via a Chinese bank without the mandatory approval of the Venezuelan National Assembly, according to an opposition lawmaker and a financial website Monday.

“On December 29th the government of Maduro contracted in an illegal manner a loan with a Chinese bank for $5 billion,” lawmaker Jose Guerra tweeted Monday. Guerra also provided a link to Cbonds, a website that offers financial information. The post in Cbonds reads: “New bond issue: Venezuela has issued international bonds for USD 5 billion maturing in 2036 with a 6.5% coupon.”

The new bond also appeared in the Bloomberg bond trading system but a check of Euroclear, the most important bond clearing agent, came up with the response that the International Security Identification Number (ISIN) for the bond - USP97475AQ39 -- was "either confidential or has not been found. It is therefore not available for inquiry."

While CBonds says that the Issue manager is Haitong International Securities, Bloomberg lists Haitong Bank, S.A.

Haitong is the second largest firm in the Chinese securities industry by total and net assets. Haitong Bank, S.A. is the investment banking subsidiary based in Lisbon, Portugal, and has offices in Mexico City and Sao Paulo.

While this is the first bond deal for Haitong or any Chinese bank in Venezuela, analysts suggest that the relationship actually came about because of Espirito Santo, not China.

"In 2014, after Portugal's Banco Espirito went belly-up, Haitong bought the investment banking unit for $466 million," says Russ Dallen of the Venezuela Opportunity Fund. "Venezuela and PDVSA were important clients of Espirito Santo -- so important that Espirito Santo actually set up a local bolivar bank in Venezuela. So it is not a surprise that Venezuela turned to those same bankers for this deal," Dallen added.

The bonds, which have a 6.5% coupon and a 20 year maturity, have a number of features that concerned Dallen and other analysts.

"First, they are apparently 'Physical Delivery'," says Dallen. "That means that these bonds are essentially bearer bonds that must be physically delivered to be paid and theoretically with coupons clipped and presented to receive interest."

Bearer bonds and physical delivery have become very scarce in the last 40 years as most bonds are never physically issued anymore and exist only in the computerized records of brokers and custodians like Euroclear, Clearstream and DTC.

"Most developed nations have done away with them," says Dallen. "But they are a favorite of drug dealers, money launderers and others who seek anonymity as well as a way to move large amounts of cash internationally in just a briefcase."

"A backpack full of bolivar bills may be just enough for lunch in Venezuela, but now you can move $5 billion in a briefcase," points out Dallen.

Two nephews of the President were recently convicted in New York of a multi-million dollar conspiracy to ship cocaine to the U.S.A. and many of the leading Chavez officials are wanted on drug trafficking or are already listed on the U.S. Treasury Department's OFAC list as "drug kingpins."


Since oil prices dropped in 2014, Maduro has had trouble keeping up high public spending (the cornerstone of the Bolivarian Revolution) and even managing existing debt: a recent and relatively modest debt swap for state oil company PDVSA had to be collateralized by 50.1% of CITGO, extended four times and sweetened with an extra 20% reward before just $2.8 billion of the $7.1 in eligible bondholders participated.

The following month, November, PDVSA was late paying all of its bonds, including a delay of 2 weeks on a $146 million interest payment.

More recently, the Venezuelan oil company had to use the remaining 49.9% interest in U.S. refinery chain Citgo to secure a $1.5 billion loan from Russian oil giant Rosneft.

Both Bloomberg and Reuters reported that Venezuela sold the $5 billion Venezuela 6.5% of 2036 bonds to Venezuela's Central Bank and to nationalized state bank Banco de Venezuela at 100 cents on the dollar, which Dallen noted was strange.

By comparison, the Venezuela 7% of 2038 trades at 43 cents on the dollar.


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