Investors Trapped as Venezuela Sanctions Halt Bond Trading

(Bloomberg) -- Trading of Venezuelan debt came to a standstill Monday after the Trump administration updated its sanctions guidelines on transactions tied to Nicolas Maduro’s regime.

Bondholders at nine investment firms and hedge funds from New York, Miami, London and Berlin said they had stopped trading sovereign notes and debt from the state oil giant Petroleos de Venezuela after the U.S. Treasury Department issued instructions they interpreted as forbidding most transactions.

Mutual funds and exchange-traded funds that are U.S. persons “may not buy, sell, or otherwise engage in transactions related to debt, equity or other holdings in blocked persons and must block such holdings, unless authorized by OFAC,” the Treasury Department said on its website. Officials declined to elaborate on the rule and its precise implications for traders.

Investors Trapped as Venezuela Sanctions Halt Bond Trading

While European and Asian funds aren’t subject to the same restrictions, the concentration of debt trading within the U.S. financial system makes it challenging for those firms to buy and sell as well. Many financial institutions, for example, adhere worldwide to U.S. sanctions. Trace, FINRA’s bond price reporting system, showed zero trades on PDVSA’s debt since last Wednesday.

“Legally and theoretically I should be able to trade these bonds, but practically I am not able to do it anymore,” said Lutz Roehmeyer, a Berlin-based money manager at Capitulum Asset Management, which holds PDVSA bonds.

The Treasury Department has said the restrictions are intended to financially cripple the Maduro government and spur regime change. It said relief will come from transferring control of state-run companies like PDVSA to National Assembly President Juan Guaido or “a subsequent, democratically-elected government that is committed to taking concrete and meaningful actions to combat corruption, restore democracy, and respect human rights.”

Treasury’s initial guidance Friday prohibited U.S. investors from purchasing PDVSA bonds and then an amendment later that day put effectively the same restrictions on the nation’s sovereign notes, according to a report by F. Amanda DeBusk, chair of Dechert’s international trade practice in Washington.

Limits on secondary debt trading may be an effort to "cut off oxygen" to the Maduro government on suspicion that Caracas is stockpiling bonds in local financial institutions which it could sell when it’s desperate for cash, as it is now, Mark Weidemaier, a professor at the University of North Carolina School of Law in Chapel Hill, wrote on the academic blog Credit Slips.

"Perhaps the U.S. government is hoping for regime change in the near future," he said. "If so, the pain bondholders feel will be temporary and offset by gains once a reasonable government is in place. But if Maduro retains power, then the pain for U.S. holders of these instruments will be significant."

The complicated and lengthy instructions from Treasury have forced investors to seek legal assistance parsing the text word-for-word.

“If the Venezuela sanctions aren’t clarified, trading of the debt will be similar to what we had with Cuban debt,” said Jean-Dominique Butikofer, the Atlanta-based head of emerging-market fixed income at Voya Investment Management, which holds Venezuelan bonds. “Everyone will trade with a legal tweezers.”

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