Chavez Takeover of Steelmaker Sidetur Sparks Bond Rally on Payoff Clause
Venezuelan President Hugo Chavez’s expropriation of steelmaker Siderurigica del Turbio SA is sparking the biggest weekly rally in the bonds in at least a year on speculation the government will pay more than face value.
The price on Sidetur’s 10 percent bonds due in 2016 jumped to 79.75 cents on the dollar today from 69.13 cents on Oct. 29, data compiled by Bloomberg show. The yield fell to 15.58 percent from 19.26 percent. Chavez said Oct. 31 that he would seize the company, citing the need to guarantee steel supplies.
The bonds contain a clause that guarantee holders payment of 101 cents if there’s any change in company ownership, prompting investors to buy the securities after the Chavez takeover, said Alberto Cardenas, head of strategy at BancTrust & Co. in Caracas.
“Investors are betting that they can benefit from a legal clause,” Cardenas said in a phone interview. “The market expects the government to honor the debt obligations of these expropriated companies.”
A spokesman at the Finance Ministry said that Minister Jorge Giordani wasn’t immediately available to comment.
Sidetur, based in Caracas, sold $100 million of the bonds in 2006. There is currently $86.3 million of the debt outstanding.
Chavez’s seizure of fertilizer company Fertilizantes Nitrogenados de Venezuela last month sparked a rally in that company’s bonds on speculation that the government will honor the $250 million debt.
Fertinitro, a joint venture between Koch Industries Inc., Venezuela’s state petrochemical firm Pequiven, Italy’s Snamprogetti SpA and Empresas Polar SA, saw the price of its 8.29 percent bonds surge 33 percent since Chavez announced the takeover Oct. 10 and after Fitch Ratings said in an Oct. 22 statement that Pequiven will most likely pay the debt.
Some Fertinitro bondholders are forming a group in response to the nationalization. The members report holding more than 65 percent of the bonds, Boston-based Bingham McCutchen LLP said in a statement Oct. 25.
“In the case of Sidetur, we think the transaction is risky,” BancTrust’s Cardenas said. “The government decreed the expropriation of the company’s assets, but it’s not clear if that corresponds to a change in legal ownership.”
Standard & Poor’s Ratings Services put Sidetur on review for a possible downgrade yesterday, according to a statement.
“The indenture of the senior unsecured notes contains a clause that requires Sidetur to make a change-of-control offer to the noteholders,” the statement said. “However, Sidetur will not be required to make this if a third party makes the change-of-control offer or if the current rating of the notes is at least as high as the rating on the issue date.”
The Sidetur bond fell 1.25 cents to 79.75 cents on the dollar today from 81 cents yesterday.
BancTrust’s Cardenas said the yields on the Sidetur and Fertinitro bonds will likely come closer in line with the sovereign yield curve on government ownership.
The government’s average dollar-bond yield fell to 12.82 percent yesterday from 13.32 percent on Nov. 3, according to JPMorgan indexes. The extra yield investors demand to own Venezuelan government bonds instead of U.S. Treasuries fell 39 basis points today, or 0.39 percentage point, to 10.17 percent, according to JPMorgan.
Chavez, who nationalized heavy crude oil ventures with Exxon Mobil Corp. and ConocoPhillips in 2007, and later took over companies in the food, cement and telecommunications industries, has accelerated government seizures this year after losing his two-thirds majority in the National Assembly. The government is in arbitration with Exxon and ConocoPhillips to compensate the companies for the seized assets.
Bondholders of two joint ventures with Exxon and Conoco, Cerro Negro and Petrozuata, received more than face value for their securities, according to Russell Dallen, head bond trader at Caracas Capital Markets at BBO Financial Services Inc. in Miami.
State oil company Petroleos de Venezuela SA repurchased millions of dollars of bonds from investors in those ventures, according to Dallen.
“The bondholders of these ventures were paid but Exxon and Conoco haven’t received any compensation,” Dallen said in a telephone interview. “They paid more than par to compensate people for the expropriation.”
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