Venezuela Debt Talks Gear Up With Red Carpets, Assault Rifles

(Bloomberg) -- Venezuela rolled out a literal red carpet for investors coming to debt restructuring talks in the capital Monday, welcoming them to a sprawling government office building downtown that was flanked by national guards carrying assault rifles and riot shields.

Officials said more than 400 bondholders had signaled plans to attend, which seemed a wholly improbable number given that not a single foreign investor contacted by Bloomberg News last week intended to make the trip. Most observers think the meeting will offer little of substance given that U.S. sanctions make it virtually impossible for the country to pull off the kind of securities exchanges that would usually be part of any debt relief.

The meeting began just after 2 p.m. at the Palacio Blanco, a neo-classical building across the street from the presidential palace in a neighborhood that’s known to be particularly dangerous at night. Officials said parts of the event will be shown live on state TV, and sanctioned officials Vice President Tareck El Aissami and Finance Minister Simon Zerpa will attend. Attendees were being served, juice, arepas and cachapas -- corn pancakes -- and at least one person who planned to take part in the meetings walked out after seeing name tags for El Aissami and Zerpa, according to people familiar with the matter.

While an invitation to debt restructuring talks would usually lure bondholders eager to have their voices heard, the unusual circumstances of Venezuela’s proposal -- and Caracas’s reputation as one of the most dangerous cities in Latin America -- are giving investors pause. The Treasury has advised U.S. investors to exercise extreme caution to avoid running afoul of sanctions imposed by the Trump administration for anti-democratic actions.

“My concern is that the meeting goes bad, and then more dominoes start to fall,” said Ray Zucaro, the chief investment officer at Miami-based RVX Asset Management, who holds Venezuelan debt but has no plans to go to the meetings. “If no one of real importance shows up, the government may say, ‘Well, we tried. So go pound sand.’”

President Nicolas Maduro summoned bondholders to begin a renegotiation of more than $60 billion of international debt as the nation’s cash crunch worsens, with central bank reserves at a 15-year-low and oil output sinking to below 2 million barrels a day at the lowest since 1989. While Venezuela is the riskiest sovereign debt in the world, it has also paid outsized returns for fund managers over the past several decades under two successive socialist governments.

But apart from the meeting, there’s plenty going on elsewhere for beleaguered Venezuelan creditors to focus on in their frantic effort to understand what comes next.

First, the European Union imposed an arms embargo as well as a legal framework to ban travel and freeze assets of Venezuela officials. Second, the International Swaps & Derivatives Association said it will meet again Tuesday to discuss whether delayed payments from the state oil company will trigger default-insurance contracts. This afternoon, credit-rating companies could declare a default after the grace period on $280 million of payments expired over the weekend; and U.S. envoy Nikki Haley is set to speak before the UN Security Council about Venezuela’s crisis.

Almost 200 people registered for information about the meeting in Caracas, according to the email addresses copied on a missive from the government to those who had signed up, including Guido Rosas at Goldman Sachs Group Inc., Jim Craige at Stone Harbor Investments, Yerlan Syzdykov at Amundi Pioneer and Francisco Rodriguez at Torino Capital.

Rodriguez, a former head of Venezuela’s congressional budget office and now closely followed economist for those obsessively tracking the country’s financial health, is attending the meeting. In a note Monday described as a guide for 36 hours in Caracas, he suggested a post-negotiation Scotch at the luxurious Hotel Cayena’s bar, as well as a visit to a high-end French restaurant and a trek to his favorite corner spot for arepas.

Venezuela’s benchmark bonds due in 2027 rose 1.7 cent to 28.9 cents on the dollar on Monday. The now four-day advance follows a selloff after Venezuela’s announcement Nov. 2 that it would seek a restructuring while continuing to service overseas debt, which it has fallen behind on after a decade of economic mismanagement. That’s left bondholders to wonder what comes next. Last week, Treasury said the only circumstance in which it may consider allowing U.S. investors to engage in a debt swap is if the opposition-led National Assembly approves the plan.

Money managers are on high-alert for any sign that the delayed bond payments have made it to their accounts. Hours after Venezuela’s state electricity firm, Electricidad de Caracas, was declared in default by its trustee Friday, the company released a statement on Twitter insisting that it had sent the cash. That reflects an ongoing challenge for the oil-rich nation and its state-owned companies: Even if they have the funds to pay, problems with intermediary banks could prevent that money from being delivered to bondholders on time.

If the ISDA panel determines PDVSA had a failure-to-pay event, the company’s credit-default swaps would trigger and grant a payout to buyers of the contracts. While it’s unclear what will come of the UN meeting in Manhattan, it’s taking place days after Argentine President Mauricio Macri said a full embargo on Venezuelan oil by the U.S. would have broad support in Latin America. Action from the EU, which has been expected, may also include a travel ban on Venezuelan officials, many of whom have second or third residences on the continent.

Mike Conelius, who manages the $6.5 billion T. Rowe Price Emerging Markets Bond Fund and has traveled to Caracas in the past, said there was no way he would fly down for a meeting he called more of a “photo-op” for Maduro’s government than a serious discussion. Despite that, the money manager says it’s feasible for Venezuela to continue honoring its debts over the next year with stable oil prices and support from allies in Russia or China.

“Maduro has proven himself to be a survivor,” Conelius said from Baltimore. “There’s certainly a scenario where they default, hit the wall and try to be Zimbabwe for a while, but I don’t think that happens now.”

--With assistance from Selcuk Gokoluk Dale Quinn Katia Porzecanski Fabiola Zerpa and David Papadopoulos

To contact the reporters on this story: Ben Bartenstein in Lima at bbartenstei3@bloomberg.net, Andrew Rosati in Caracas at arosati3@bloomberg.net, Patricia Laya in Washington at playa2@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Daniel Cancel at dcancel@bloomberg.net, Brendan Walsh

©2017 Bloomberg L.P.