On Monday night, the Office of Foreign Assets Control (OFAC) added PDVSA to the specially designated nationals list, the list of people and entities US persons cannot do business with.
Many banks and investors have interpreted this as a restriction on trading in PDVSA’s nine bonds (totalling $27bn of issuance), specifying that US holders must sell to non-US persons, as they did with Rusal last year.
But as was the case for the Rusal bonds that were previously affected by similar sanctions, Euroclear is once again uncertain as to whether it can settle any trades, leaving investors in a Catch-22 situation where they do not believe it is legal to hold the bonds and nor do they have any way of ridding themselves of them. They are awaiting clarity.
As with Rusal, international banks are not making markets in the bonds, meaning investors must deem their value to have plummeted below even the cash prices of between 25 and 30 that the unsecured bonds were trading at before the sanctions announcement.
For Venezuela, it seems that Nicolas Maduro, its 46th president, will have to leave office for the sanctions to be lifted. There will be no easy fix of a company owner selling his stake (as Russian oligarch Oleg Deripaska did to ease the sanctions on Rusal and EN+) because PDVSA is state-owned.
Investors are once again claiming that this type of sanction targets the wrong people. The US means to turn off liquidity to the company, but as the rules affect debt already in existence, it is US bondholders who get hurt instead.
EM investors are once again frustrated and a repeat of sanctions of this kind was unexpected, given the losses US bondholders swallowed on Rusal and EN+.
But amid the anger, a lesson needs to be learned. The US does not mind hurting its own investors while it is exerting power overseas. Any hope that sanctions of this type would not be used again is now extinguished. Despite the ravaging of bondholders’ returns, the US has clearly been pleased with the use of this kind of tactic in Russia to get investors to put pressure on companies and governments, which is why it is using this tool again.
EM investors should beware. International investor cries that the US government should protect their own have fallen on deaf ears. When the US threatens sanctions now, this is the type that are on the table.