Maduro pays drug debt with distressed bonds
People walk in front of the Bayer headquarters building in Caracas, Venezuela.
By Brian Ellsworth, Ben Hirschler and Tim Mclaughlin
Dollar-denominated transactions in 2015 allowed Venezuela
CARACAS/LONDON/BOSTON — Venezuela has settled debts with at least three global drug companies by giving them bonds that trade at a heavy discount, a further sign of the country’s worsening financial crisis.
Novartis, Bayer and Sanofi acquired dollar-denominated bonds from state-owned oil company PDVSA that they resold for as little as a third of their face value, according to a Reuters analysis of regulatory filings and sources with knowledge of the situation. This contributed to some US$500 million in foreign exchange losses that the three companies suffered in Venezuela in 2015.
The extent of the bond transactions had not been previously reported.
The payment method provided a shortcut around the country’s troubled 13-year-old currency control mechanism, which has been blamed for the country’s deep recession and chronic product shortages under President Nicolás Maduro.
Companies are required to sell products in bolivars but then struggle to convert them into hard currency through the government’s currency board.
Venezuela tries to use an official exchange rate of 10 bolivars to the US dollar for priority goods such as food and medicine. The rate is the result of a devaluation last month from the previous rate of 6.3 bolivars.
However, Venezuela, which gets nearly all of its foreign exchange from oil exports, has had fewer dollars to disburse as a result of the crash in oil prices in the past two years. That has left it without enough dollars to pay down debts to pharmaceuticals companies at the preferential exchange rate. Few of the alternatives are palatable. They include holding a rapidly deteriorating currency or using a much weaker official exchange rate of 206 bolivars to the dollar. The black market rate is close to an extraordinary 1,100 bolivars to the dollar, valuing the Venezuelan currency at less than 1 percent of the official rate.
A loss, but in dollars
Novartis said it agreed to acquire PDVSA bonds with a face value equivalent to the amount it was owed, and later sold them at a roughly two-thirds discount. Novartis reported a loss of US$127 million on its sale of PDVSA 2024 bonds, leaving it with proceeds of just US$73 million from the operation. The bonds currently trade at about 31 cents on the dollar, with a yield of 27 percent.
Neither Bayer nor Sanofi provided details on their bond transactions, but sources familiar with the situation said they accepted similar steep discounts. They declined to comment on whether they had any other option for repatriating their funds.
Investors who track Venezuela say the deals makes sense for the companies despite the losses. The bond purchases represented a chance to get dollar denominated assets, even ones that had to be sold at a heavily discounted price.
Food and oil
At the black market rate, Novartis would have been left with only a tiny sliver of what it was owed.
Sanofi in 2015 recorded a currency loss of 240 million euros (US$264 million) associated with its Venezuela operations. A spokesman said this was the result of “a variety of payment means including dollar-denominated bonds.”
In early 2015, several big drug companies were still holding out to convert their bolivars into dollars at the most favourable exchange rate permitted by law, US regulatory filings show. In a typical disclosure, Pfizer, for example, said last May that it continued to believe that the nature of its business, shipping medicine to Venezuela, would qualify for the most preferential rates.
Last month, Pfizer said it expects an US$800 million “negative impact” related to Venezuela in 2016, but did not immediately respond to questions about whether it was involved in any Venezuela bond transactions.
Buying bonds to obtain hard currency assets has so far mostly been a path used by foreign multinationals. A proposal by Venezuela’s principal industry association for a similar mechanism for local companies to settle debts with foreign providers has so far gained no traction.
Two sources in the Venezuelan food industry, which has struggled to maintain operations due to a lack of imported raw materials, told Reuters that they would not accept an arrangement in which their providers were required to assume such heavy discounts. They insisted that the government should fully pay off those debts.
Venezuela in March 2013 used a similar scheme to settle debts with oil services companies, including Weatherford International, which said it received bonds from PDVSA that year in exchange for unpaid bills. It said it sold them for around half their face value.
Maduro has vowed to maintain social programmes created by his mentor and predecessor, late socialist leader Hugo Chávez, including expanded access to low-cost medicine.
But with fewer dollars available for health sector imports, Venezuelans struggle to obtain products ranging from simple ointments to life-saving cancer drugs. Long pharmacy lines and social media pleas for help obtaining pharmaceuticals are routine.
Better than nothing
At a least a dozen major US companies, including Procter & Gamble, Pepsico, Colgate Palmolive, Kimberly-Clark and Mondelez International, have deconsolidated their operations in Venezuela, resulting in several billion dollars in write downs over the past year. The accounting manoeuvre largely insulates their consolidated financial results from Venezuela’s economic turmoil.
Drugmaker GlaxoSmithKline in 2015 reported a US$130 million Venezuela foreign exchange loss after switching to a 200 bolivar per dollar exchange rate, 97 percent weaker than the official rate it had previously used.
Merck in 2015 reported an US$876 million foreign exchange loss related to Venezuela. The firm declined to comment when asked if this was related to bond operations.
Venezuelan bonds are the riskiest of any issued by an emerging market nation, according to the JPMorgan Global Diversified Emerging Markets Bond Index. They pay on average some 31 percentage points more than similar US Treasury bills, nearly triple that of war-torn Iraq.
Investors worry PDVSA will be unable to meet heavy debt service of around US$7.5 billion between March and December unless there is a major rebound in crude oil prices.
Maduro dismisses default talk as a right-wing smear campaign. Government officials note that the neither the country nor state oil company PDVSA have missed a bond payment under the ruling Socialist Party.