By Kejal Vyas
CARACAS – Creditors of a nationalized Venezuelan steel company say they are surprised the firm defaulted on an interest payment last month and are asking the government to explain the situation in a case that some see jeopardizing the South American country’s access to foreign capital markets.
Despite the anticapitalist rhetoric of late President Hugo Chávez during his 14 years in power, he always honored payments to bondholders. It was that track record, in addition to high yields, that kept bond investors coming back to the oil-rich South American country.
But on July 20, the government under Mr. Chávez’s successor, Nicolás Maduro, failed to make a coupon payment on about $74 million in outstanding 10% coupon 2016 bonds issued by Siderúrgica del Turbio SA, or Sidetur. The local steel company was a division of private steel firm Sivensa until it was expropriated by the government in 2010.
The default could trouble Venezuela’s standing in overseas debt markets at a time when Finance Minister Nelson Merentes is seeking to reduce the country’s borrowing costs, which rank among the highest in the developing world.
Some analysts expect the country to tap international markets later this year as a way to inject dollars into the local economy, which is suffering from shortages of greenbacks and a dramatic weakening of its bolivar currency.
“Until now the market has not been putting much attention on [Sidetur] given that it’s a small amount, but if the bondholders demand a payment from the republic, that will increase noise as well as country risk,” said Barclays analyst Alejandro Grisanti.
The country’s economic problems and often-hostile relations with foreign investors have helped keep the risk premium on Venezuelan government debt at more than nine percentage points over U.S. Treasurys, greater than those of Belize, Belarus and Pakistan and second in the developing world only to that of Argentina, according to J.P. Morgan’s Emerging Market Bond Index Global.
Mr. Merentes, in a July 28 interview with local daily El Nacional, said a “technical analysis” conducted by the attorney general’s office concluded that the debt was from its private owners and therefore not the responsibility of the government. He said officials would nevertheless create a trust fund “to have as a guarantee while the situation is cleared up” but didn’t offer further details.
In October, just after the government seized Sidetur’s bank accounts, Industry Minister Ricardo Menéndez said a “fair price” for the assets would be paid but then in February said the previous owners ought to be liable for the debt. “Simply, he who generates the debt pays it,” Mr. Menéndez said at the time. Press officials at the finance and industry ministries didn’t respond to calls seeking comment.
Sivensa and Sidetur were partly owned by the family of a prominent opposition congresswoman, María Corina Machado, who has frequently butted heads with the government of Mr. Maduro. Ms. Machado and company officials declined to comment, citing the sensitivity of the matter.
Lawyers from U.S.-based Bingham McCutchen LLP representing a Sidetur bondholders committee requested that proceeds from the trust fund be used to honor the debt obligations, according to a letter sent to the Finance Ministry last week. They called it a “practical solution” that would also help in “protecting Venezuela’s untarnished reputation for ensuring that debts of nationalized businesses are repaid.”
But the committee hasn’t received a response from the Venezuelan government, said Ray Zucaro, a portfolio manager at SW Asset Management, which oversees $265 million in corporate debt and holds Sidetur bonds. Mr. Zucaro said officials haven’t returned his phone calls seeking clarification on the matter.
The case of Sidetur has puzzled market participants because of the relatively small amount of debt versus the potential fallout from not honoring it, said Russ Dallen, a partner at Caracas Capital Markets.
The $74 million in outstanding bonds is less than a quarter of the country’s average daily income from oil sales this year. State energy monopoly Petroleos de Venezuela, or PDVSA, the country’s breadwinner, recorded $60.6 billion in revenue during the first half of 2013.
“You have to ask, ‘What’s going to happen when oil is not $100 a barrel?’” said Mr. Zucaro. “You can’t just take the company’s assets and leave behind the debt. You can’t take the good and not take the bad.”
Mr. Zucaro said the bondholders committee would like to avoid taking Venezuela to court and targeting its assets for repayment, but he didn’t rule out the possibility, which he described as “the nuclear option.”
Bondholders had always been paid in other major expropriation cases, such as those of fertilizer company FertiNitro and oil ventures Cerro Negro and Petrozuata, even though the former joint owners of those companies – which include U.S. multinationals such as Koch Industries, Exxon Mobil and ConocoPhillips, respectively – remain years later in international arbitration courts seeking compensation.
The case of Sidetur “seems to be a one-off, but the signal isn’t positive,” said Credit Suisse economist Casey Reckman.
