PDVSA Bonds Decline Following U.S. Sanctions Over Iran

Petroleos de Venezuela SA bonds plunged, pushing yields up the most in three months, after the U.S. announced sanctions on the state-owned oil company for supporting Iran’s energy industry in ways that might aid the country’s alleged “illicit” nuclear activities.

The yield on 8.5 percent dollar-denominated bonds due 2017 jumped 39 basis points, or 0.39 percentage point, to 15.65 percent at 2:29 p.m. in New York, according to prices compiled by Bloomberg. The price fell 1.31 cents on the dollar to 71.58 cents. The price sank as much as 1.72 cents earlier in the day.

PDVSA, as the company is known, delivered at least two cargos of a gasoline additive to Iran between December and March, worth about $50 million, the U.S. State Department said today in an e-mailed statement. The sanctions prohibit the company from competing for U.S. government procurement contracts, from getting financing from the U.S. Export-Import Bank and from obtaining U.S. export licenses. The sanctions don’t prohibit the export of crude oil to the U.S.

“These sanctions constitute a warning shot from the U.S. government to Venezuela in its dealings with the Iranian regime,” Boris Segura, Latin America economist at Nomura Securities International, wrote in a note to clients. “The authorities’ reaction at this juncture is key. If they interpret these sanctions as an attack of the ‘empire’ on the revolution, we could expect further measures to try to armour plate the country from potentially more severe sanctions.”

Local Law

Venezuela could decide to cease issuing bonds under international legislation and rely instead on local law which would have a negative effect on Venezuela and PDVSA’s borrowing costs, Segura said.

Venezuelan President Hugo Chavez and Iran’s Mahmoud Ahmadinejad have forged diplomatic and commercial ties as Iran faces international sanctions over suspicions it is trying to develop nuclear power. Chavez has said he wants to break up what he calls U.S. “hegemony” in world affairs.

Chavez has backed Iran’s plans to develop nuclear energy, saying he will stand by the country “under any circumstances.”

While the sanctions specifically target refined petroleum-related activities, the State Department said the measures “target Iran’s ability to acquire and utilize resources in support of its illicit nuclear activities.”

Venezuelan Oil Minister Rafael Ramirez has repeatedly denied sending gasoline to Iran since sanctions on the Middle Eastern country were approved. Chavez had been selling as many as 20,000 barrels a day of gasoline to Iran, Asdrubal Chavez, vice president of state oil company Petroleos de Venezuela SA, told reporters Feb. 10, 2010.

Investors’ Reaction

Press officials at Chavez’s office and the Finance Ministry declined to comment. Both asked not to be identified because of internal policy. A press official at PDVSA, who also asked not to be named, had no immediate comment. Ramirez is scheduled to speak to reporters later today.

Paul Biszko, an emerging-market strategist at Royal Bank of Canada in Toronto, said the steeper selloff in the bonds earlier today was due to investors’ initial confusion about the extent of sanctions.

“Things have settled as people get a better sense of what it means, and that’s not much really,” Biszko said in a phone interview. “Chavez has dissuaded government entities from doing business with U.S. financial institutions, and I don’t think Venezuelan companies have been in the running for any big contracts lately.”

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