When Chávez Seizes, Bondholders Profit

Venezuela pays premiums on the debt of nationalized companies

By Daniel Cancel

Carlos Garcia Rawlins/Reuters

Venezuelan President Hugo Chávez says capitalism is “ruining the world.” His actions tell a different story.

Dollar-denominated bonds issued by FertiNitro, a joint venture operated by Koch Industries and state-run chemical company Pequiven, were trading at 68¢ on the dollar the day before Chávez nationalized the company in October 2010. Bondholders have argued that the seizure triggered a clause that requires the government to redeem the bonds for more than their face value. On Nov. 22, the government offered to buy back the bonds for $1.05 on the dollar, or 54 percent more than they were trading for before the nationalization. “For all the noise associated with Chávez, he’s been very good to bondholders,” says Raymond Zucaro, who helps manage and advise on about $260 million of emerging market corporate debt, including FertiNitro bonds, at SW Asset Management in Newport Beach, Calif. “He’s never defaulted on any fixed-income obligations.” Pequiven says that more than 99 percent of its bondholders have agreed to sell their securities in response to the government’s offer.

At the same time bondholders are profiting, Koch has gone to court to seek compensation for its seized assets. Pequiven and Koch each held 35 percent stakes in the venture. Pequiven declined to comment further, according to a lawyer representing the company. Koch spokeswoman Melissa Cohlmia and the Venezuelan Information Ministry didn’t respond to requests for comment.

Zucaro, the FertiNitro bondholder, said payouts were triggered by the nationalization and change of ownership of the company. After bondholders asked the government to negotiate, it “agreed to sit down and talk with us, and we eventually reached an amicable settlement,” Zucaro says. The FertiNitro payout mirrors a similar situation involving joint ventures between Petróleos de Venezuela, the state oil company, and ExxonMobil (XOM) and ConocoPhillips (COP). Petróleos de Venezuela repurchased about $1.2 billion in bonds from investors in 2007 and 2008 after the U.S. oil companies refused to accept the terms of Chávez’s nationalization of the industry.

Chávez has seized companies in the energy, food, metals, cement, and banking industries as part of his plan to turn Venezuela into a socialist country. Venezuela has compensated shareholders of seized companies including Ternium (TX), Cemex (CX), and Banco Santander (STD) while facing as many as 18 arbitration cases at the World Bank’s International Centre for Settlement of Investment Disputes.

Bonds of steelmaker Siderurgica del Turbio, known as Sidetur, may be the next opportunity for investors to profit from a nationalization, according to Russell Dallen, head bond trader at Caracas Capital Markets, and fund managers at Knossos Asset Management in Caracas. The company’s assets were seized on Oct. 31, 2010. Sidetur, which continues to be run by its private owners with government oversight, is waiting to be compensated for its assets, says Oswaldo Sahmkow, finance director of Sivensa, Sidetur’s parent company.

Sidetur has $81.3 million of 10 percent bonds due in 2016 outstanding. The price on the securities surged 27 percent, to 83¢ on the dollar, following the nationalization in 2010 on speculation that the government would have to tender an early offer above face value. Since then the price has fallen, reaching 76.5¢ on the dollar on Dec. 12, which means a bond yield of 17.89 percent, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The FertiNitro deal “is a good precedent for what we’re expecting with Sidetur,” says Francisco Ghersi, co-managing director of Knossos, which owns some of the bonds. “It’s worth waiting and taking the risk while earning spectacular yields along the way.”