Investing in Venezuela Could Be Hugely Profitable or Potentially Lethal

  • Venezuela’s distressed bond lure investors in zero-rate world
  • Yet risks, highlighted by canceled Barclays trip, are high

A protester kicks a Bolivarian National Police vehicle during pro-opposition demonstrations in Caracas on June 7.

Photographer: Carlos Becerra/Bloomberg

Barclays Plc has decided that Venezuela is too dangerous for its bond-investor clients. No, not as in default kind of dangerous. Sure that’s possible but Barclays is more worried right now about things like kidnapping and murder.

Last month, the bank canceled a trip to take a group of money managers to Caracas after its security team deemed the trip “unwise” without “significantly enhanced” safety measures, according to an e-mail sent to investors that was obtained by Bloomberg News.

The decision highlights an unusual point of tension in this nook of the bond world. At a time when interest rates are near zero or even negative in many countries across the globe, the 23 percent yield offered by Venezuela’s benchmark dollar bonds stands out as a rare opportunity for the bravest of investors to make a big score. Before taking that plunge and buying the debt of a nation mired in crisis, though, investors will typically want to see the place first-hand, talk to government officials and business executives and assess the mood on the ground. In Venezuela, that means walking into a country convulsed by an economic collapse, spontaneous street protests and soaring crime.

QuickTake Venezuela on the Brink

While JPMorgan Chase & Co. went through with a client trip several weeks ago and Bank of America Corp. plans on going ahead with one scheduled for next month, Barclays told clients including Pharo Management and Blackstone NWI Asset Management that the risk was too great. Scheduled for the week of July 11, the trip was to give them face-time with a top economic aide to President Nicolas Maduro, leaders of the opposition and experts on the country’s oil industry, according to a copy of the itinerary.

“The situation in Venezuela is more concerning than was previously considered,” Ellis Thomas, the bank’s head of emerging-market credit sales, and Alejandro Arreaza, the economist for Venezuela, said in the e-mail informing clients that the trip was canceled.

Barclays analyzes travel requests on a case-by-case basis and doesn’t rule out green-lighting trips to Caracas again in the future, according to a person familiar with the firm’s policies. Spokesman Marc Hazelton declined to comment.

U.S. Warning

Home to the world’s third-highest homicide rate, Venezuela has long been one of the globe’s most dangerous places. As the collapse in oil prices deepened the economic crisis and exacerbated food shortages, crime has become widespread. That has in turn fueled vigilante justice: a rash of mob lynchings, predominantly in poorer neighborhoods, has swept across the country this year.

While bank-organized treks to Caracas, like the Barclays outing, tend to largely keep travelers in the wealthier, and safer, eastern part of the city, risks still abound. In March, an Egyptian tourist was murdered in an attempted robbery just feet outside the international airport’s doors, the local press reported. And one day before Barclays canceled its trip, the U.S. State Department renewed its travel warning for the South American country, saying crime is even common in “areas generally presumed safe and frequented by tourists.”

An added concern is that people perceived to be carrying dollars attract attention in a country where inflation is spiraling out of control, according to Raul Gallegos, a senior analyst at political and security risk consulting firm Control Risks. It labels Caracas a “very high risk” area, just one notch below the rating it gives to places in civil war.

“I’ll go to Nigeria, I was in Turkey right before the coup, but Venezuela’s just a little too tense,” said Ray Zucaro, the chief investment officer of emerging-markets hedge fund RVX Asset Management in Miami and the husband of a Venezuelan native. “It’s just a bad spot.”

The country’s bonds, though, are so tempting. In recent days alone, Goldman Sachs Asset Management and BlueBay Asset Management both said the debt looks attractive. The benchmark notes due 2027 yield some 18 percentage points more than the emerging-market average, according to JPMorgan indexes. While concern has been building for the past two years that a default was imminent, the government has managed to scrounge together the funds to remain current on its foreign debt and insists it will continue to do so.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE