Have You Suffered Losses Due to Investments in Venezuela Bonds?

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Erez Law is currently investigating brokers and brokerage firms around the country who recommended their clients invest in Venezuelan bonds. If your broker or brokerage firm sold you the Venezuela bonds without disclosing the risks, Erez Law may be able to help you recover your losses.

Venezuela holds the world’s largest supply of crude oil, ahead of Canada and Saudi Arabia, which was once seen as a nearly endless supply of cash for the South American country. Today, the government is running out of money, prices of goods are soaring, and quality of life for residents is quickly deteriorating.

The Hugo Chavez-led government of 1999-2013 overspent on welfare programs, abandoned farmland and made the country dependent on selling oil abroad, and accepted millions in brides for construction projects that racked up additional national debt. Then once the cost of oil declined, the country’s main source of revenue took a hit. A supply glut in 2014 and 2015 led to some of the lowest prices the market has seen in recent years. In turn, securities values also dropped. The volatile energy sector experienced significant turmoil, and many energy companies were negatively impacted when global crude oil prices fell below $40 per barrel at the end of 2015. This was the lowest level since early 2009, as supply was in excess of global demand. Today, oil hovers around $50 a barrel, leaving Venezuela’s income cut in half.

Venezuela’s currency, the bolivar, has been devalued to the point of being basically worthless. Venezuela is currently facing hyperinflation that is growing by 3% each day, according to the Financial Times, and is likely to reach 1,000,000%, as the country produces banknotes in response to their economic crisis. It is also expected that the country will contract by 18%, the third year in a row of double-digit decline, and will lead to spillover effects in neighboring countries that have taken in poor Venezuelan immigrants.

Investors have a lack of confidence in Venezuela, both in the country’s oil infrastructure and government stability, thus the debt relief by means of restructuring is not on the horizon. With Venezuela’s declining oil production, not only will their financial stability be negatively impacted but their future payments will therefore result in higher interests, loss of principals, a much lower cash flow, and compounded debt. By the end of 2018, the government and PDVS (Petróleos de Venezuela, S.A.), the Venezuelan state-owned oil and natural gas company, must repay $13 billion in debt obligations, however foreign currency reserves are at $10 billion as of November 2017, leaving a $3 billion debt.

In May 2017, Goldman Sachs bought $2.8 billion worth of 2022-maturing bonds issued by the Venezuelan state oil firm PDVSA for just $865 million, or 31 cents on the dollar. As of November 2017, the price of the bonds were down to 25 cents on the dollar, following Venezuelan President Nicolas Maduro’s announcement to restructure $60 billion sovereign and PDVSA debt, causing Goldman to lose at least $54 million as of that time.

In March 2018, Moody’s downgraded the government of Venezuela’s foreign currency and local currency issuer ratings, foreign and local currency senior unsecured ratings, and foreign currency senior secured rating to C from Caa3. The foreign currency senior unsecured medium term note program was downgraded to (P)C from (P)Caa3. These downgrades were based on:

Moody’s expectation that the continuing erosion of Venezuela’s payment capacity will lead to heavy losses to bondholders, with ongoing defaults on interest payments on various bonds compounded by upcoming principal maturities

The limits on Venezuela’s ability to restructure its debt posed by current US sanctions that prevent US investors from accepting new debt instruments under a potential debt exchange, which will further exacerbate losses.

Moody’s also lowered Venezuela’s long-term country ceilings: the local-currency country ceilings for bonds and bank deposits to Ca from Caa2; the foreign-currency bond ceiling to Ca from Caa3; the foreign-currency bank deposit ceiling to C from Ca. The short-term foreign currency bond and deposit ceilings remain unchanged at Not-Prime (NP). These downgrades demonstrate Moody’s view that Venezuela’s capacity to service its principal and interest obligations will remain severely impaired, and that losses to bondholders will be very high, most likely in excess of 65%. It is unlikely that refining or restructuring is an option for Venezuela. The current pricing of Venezuela’s outstanding debt will be a “very low recovery value for bondholders,” and will most likely result in Moody’s lowest rating of C.

In March 2018, the United States government declared that any digital forms of provisional financial transactions acted for or by the Venezuelan government would be considered “unlawful” and therefore, prohibited.

In response to the Venezuelan elections in May 2018, the United States government issued an executive order for the seizure of government-owned collateral for any unpaid Venezuelan bond would have been illegal. However, this action raised concerns in Washington that the Maduro government may take advantage of the sanctions to “default on its bond obligations without consequence.”

In August 2018, the United States Treasury Department modified the wording of its sanctions against Venezuela. The sanctions now allow US bondholders to seize the country’s assets should the Caracas government default in the repayment of its state oil company bonds, which are due to expire in 2020.

As of March 2017, the price of the Venezuela 15-year bond was $24.032, and one year later the bonds aw a 79.21% decrease down to $9.876. As of August 2018, the 15-year Venezuelan bond stands at $11.92. For the Venezuela 20-year bond, as of March 2017 the bond was valued at $22.268, and it saw a 80.30% decrease one year later, dropping it’s value to $6.908. As of August 2018, the Venezuela 20-year bond sits at $8.733.

Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, brokers across the country may be liable for investment or other losses suffered by its customers.

Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.

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Author: Jeffrey Erez

The founder of Erez Law, Jeffrey Erez, focuses exclusively on securities arbitration and litigation. Mr. Erez passionately believes in representing aggrieved investors and obtaining justice for his clients through litigation.