Bloomberg News

Chavez Windfall for Bondholders Means 60% FertiNitro Return

December 13, 2011

(Adds Sidetur price gain in 20th paragraph.)

Dec. 6 (Bloomberg) -- Venezuelan President Hugo Chavez, who says that capitalism is “ruining the world,” is handing bond investors a windfall by nationalizing a chemicals company.

Dollar notes from FertiNitro, the joint venture operated by Koch Industries Inc. and state-run chemical company Pequiven, returned 60 percent since the nationalization in October 2010. Yields on the securities have dropped 6.29 percentage points to 8.35 percent since then as bondholders argued that the seizure triggered a clause requiring a payout above face value. The government offered on Nov. 22 to buy back the notes at 105 cents on the dollar, up from 68 cents the day before the takeover.

Chavez, 57, has seized companies in the energy, food, metals, cement and banking industries as part of his plan to turn Venezuela into a socialist country. Gains on the FertiNitro securities dwarf the 15 percent return on Venezuelan government dollar bonds and a 1.5 percent gain for JPMorgan’s emerging- market corporate bond index in the period.

“For all the noise associated with Chavez, he’s been very good to bondholders,” said Raymond Zucaro, who helps manage and advise on about $260 million of emerging-market corporate debt, including FertiNitro bonds, at SW Asset Management LLC in Newport Beach, California. “He’s never defaulted on any fixed- income obligations and frankly the yield doesn’t reflect that.”

Venezuela and state-oil company Petroleos de Venezuela SA have sold a combined $17.2 billion in bonds this year as part of a drive to increase public spending ahead of Chavez’s re- election bid in October. Venezuela has the highest borrowing costs of major emerging-market economies.

Borrowing Costs

The extra yield that investors demand to hold Venezuelan debt fell 17 basis points, or 0.17 percentage point, to 1,251 at 4:20 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index. That compares to 214 basis points for Brazil and 205 for Mexico.

The 60 percent return for FertiNitro is based on a price of 99.625 cents on the dollar, which was the last trade reported on Nov. 4 by Trace, the bond price reporting system of the Financial Industry Regulatory Authority. If FertiNitro investors swap the 8.29 percent bonds in Pequiven’s tender offer today, the profit will be even greater as they will get 105 cents.

Investors anticipated Venezuela would pay above face value because of past precedents with seized oil ventures, said Russell Dallen, head bond trader at Caracas Capital Markets.

“Any time the market offers you the chance to essentially double your money in a year you have to jump at it,” Dallen said from Miami.

Sidetur

Bonds of steelmaker Siderurgica del Turbio SA, known as Sidetur, may be the next opportunity for investors to bet on a tender offer ahead of maturity after the company’s assets were seized on Oct. 31, 2010, according to Dallen and fund managers at Knossos Asset Management in Caracas.

“This is a good precedent for what we’re expecting with Sidetur,” said 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.”

Pequiven said that 79 percent of bondholders have entered into a “lock-up agreement” to return the securities. While bondholders are set to be paid for the notes, Koch is seeking compensation for its seized assets in arbitration courts. Pequiven and Koch each held 35 percent stakes in the venture.

Amicable Settlement

Pequiven declined to comment further, Jose Valdivia, a partner at Hogan Lovells US LLP representing the company, said in an e-mail. Koch spokeswoman Melissa Cohlmia didn’t return an e-mail seeking comment and wasn’t available to speak by phone.

The Venezuelan Information Ministry didn’t respond to an e- mail seeking comment.

Zucaro, the FertiNitro bondholder, said that covenants in the indenture were triggered due to the nationalization and change of ownership of the company, which prompted the government to negotiate after being approached by investors.

“They agreed to sit down and talk with us and we eventually reached an amicable settlement,” Zucaro said.

The FertiNitro payout mirrors similar cases for bondholders of two joint ventures with Exxon Mobil Corp. and ConocoPhillips, known as Cerro Negro and Petrozuata.

PDVSA repurchased about $1.2 billion of bonds from investors in 2007 and 2008 after the U.S. oil companies refused to accept the terms of Chavez’s nationalization of the industry.

Bond Tender Offer

The price of the Sidetur bonds surged in the days after its nationalization to 83 cents on the dollar on speculation that clauses in the notes could trigger a tender offer before maturity similar to the one for FertiNitro before falling below 70 cents in July, Trace data show, as bets for an immediate tender offer faded.

Yields on the 10 percent bonds due in 2016 fell 147 basis points today, or 1.47 percent, to 18.67 percent, according to Hapoalim Securities USA Inc. The price of the bonds rose 3.5 cents to 74.5 cents on the dollar today.

Sidetur’s $81.3 million in outstanding bonds are “very illiquid,” Knossos’s Ghersi said.

Sidetur continues to be operated by its previous owners with government supervision as they negotiate a payment for the expropriated assets, which have a book value of 1.2 billion bolivars ($288 million), Oswaldo Sahmkow, finance director of Sivensa, Sidetur’s parent company, said in a phone interview.

Expropriation Appeal

Sidetur is appealing the expropriation decree, according to an earnings statement on its website. The steelmaker will buy back its debt once it receives compensation, Sahmkow said.

“The contract obliges us to do so,” he said. “The owners of Sidetur will continue to collaborate with the bondholders.”

Carmelo Haddad, who co-manages a $1.6 million fund with his partner Ghersi in Caracas at Knossos and holds Sidetur bonds, said that while the market isn’t betting on an immediate tender offer for Sidetur, negotiations may pick up following the FertiNitro deal.

“If negotiations start again the securities could heat up,” Haddad said. “It’s such a small amount that the government isn’t interested in defaulting on the bonds.”

--With assistance from Corina Rodriguez Pons in Caracas. Editors: Lester Pimentel, Brendan Walsh

To contact the reporter on this story: Daniel Cancel in Caracas at dcancel@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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