Venezuela uses dis­tressed bonds to set­tle debts with drug­mak­ers

The Pak Banker - - 6BUSINESS -

Venezuela has set­tled debts with at least three global drug com­pa­nies by giv­ing them bonds that trade at a heavy dis­count, a fur­ther sign of the OPEC na­tion's wors­en­ing fi­nan­cial cri­sis.

No­var­tis AG NOVN.VX, Bayer AG and Sanofi SA ac­quired dol­lar-de­nom­i­nated bonds from state-owned oil com­pany PDVSA that they resold for as lit­tle as a third of their face value, ac­cord­ing to a Reuters anal­y­sis of reg­u­la­tory fil­ings and sources with knowl­edge of the sit­u­a­tion. This con­trib­uted to some $500 mil­lion in for­eign ex­change losses that the three com­pa­nies suf­fered in Venezuela in 2015, The ex­tent of the bond trans­ac­tions has not been pre­vi­ously re­ported.

The pay­ment method pro­vided a short­cut around the coun­try's trou­bled 13year-old cur­rency con­trol mech­a­nism. The sys­tem is widely re­garded as a pri­mary cause of run­away in­fla­tion, a deep re­ces­sion and chronic prod­uct short­ages that have af­flicted Venezuela's econ­omy un­der so­cial­ist Pres­i­dent Ni­co­las Maduro.

Com­pa­nies are re­quired to sell prod- ucts in bo­li­vars but then strug­gle to con­vert them into hard cur­rency through the govern­ment's cur­rency board.

Venezuela tries to use an of­fi­cial ex­change rate of 10 bo­li­vars to the dol­lar for pri­or­ity goods such as food and medicine. The rate is the re­sult of a de­val­u­a­tion last month from the pre­vi­ous rate of 6.3 bo­li­vars.

How­ever, Venezuela, which gets nearly all of its for­eign ex­change from oil ex­ports, has had fewer dol­lars to dis­burse as a re­sult of the crash in oil prices in the past two years. That has left it with­out enough dol- lars to pay down debts to phar­ma­ceu­ti­cals com­pa­nies at the pref­er­en­tial ex­change rate.

Few of the al­ter­na­tives are palat­able. They in­clude hold­ing a rapidly de­te­ri­o­rat­ing cur­rency or us­ing a much weaker of­fi­cial ex­change rate of 206 bo­li­vars to the dol­lar. The black mar­ket rate is close to an ex­tra­or­di­nary 1,100 bo­li­vars to the U.S. dol­lar, valu­ing the Venezue­lan cur­rency at less than 1 per­cent of the of­fi­cial rate.

No­var­tis said it agreed to ac­quire PDVSA bonds with a face value equiv­a­lent to the amount it was owed, and later sold them at a roughly two-thirds dis­count. No­var­tis re­ported a loss of $127 mil­lion on its sale of PDVSA 2024 bonds VE107037462=, leav­ing it with pro­ceeds of just $73 mil­lion from the op­er­a­tion. The bonds cur­rently trade at about 31 cents on the dol­lar, with a yield of 27 per­cent.

Nei­ther Bayer nor Sanofi pro­vided de­tails on their bond trans­ac­tions, but sources fa­mil­iar with the sit­u­a­tion said they ac­cepted sim­i­lar steep dis­counts. They de­clined to com­ment on whether they had any other op­tion for repa­tri­at­ing their funds. A fixed-in­come trader who fol­lows the Venezue­lan mar­ket said he no­ticed heavy sell­ing of the PDVSA 2024 bonds start­ing in Jan­uary, and es­ti­mated that more than $500 mil­lion of the bonds flooded the mar­ket. This co­in­cided with a sharp drop in the price of the bond, which fell to 25 cents in the dol­lar from 37 cents. The trader added he did not think fi­nan­cial in­sti­tu­tions would have sold the bonds at such low prices. It is un­clear whether this was di­rectly re­lated to sell­ing by the drug com­pa­nies.

Venezuela's In­for­ma­tion Min­istry, which han­dles me­dia re­quests on be­half of the Fi­nance Min­istry, did not re­spond to a re­quest for com­ment.

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