Listen, Nomura's head of Latin America FI strategy, Siobhan Morden, thinks there's something you need to understand about Venezuela's efforts to "restructure" their debt and that's this:
Maduro’s choice of OFAC-designated drug trafficker Tareck El Aissami as lead negotiator makes restructuring a non-starter for investors.
As it turns out, the best way to gain an audience with bondholders isn't to put a cocaine kingpin in charge of the negotiations.
To let the U.S. Treasury tell it, El Aissami was moving thousands of kilos and has ties to traffickers from Mexico to Colombia.
Of course he's hardly alone when it comes to being both a Venezuelan government official and a blow trafficker and this certainly wouldn't be the first time the words "bonds", "bankers," "billions", and "blow" were used in the same story, but asking bondholders to come to Caracas for a pow wow with a sanctioned narco looks like it might be a bridge too far.
"Nobody will want to go near something that could be an OFAC violation," Gramercy Funds' CIO Robert Koenigsberger told Bloomberg this week, adding that "if the Venezuelans say, ‘We want to talk over the restructuring with you,’ I’d say, ‘I’m not letting you in the building.’ I like sleeping in my own bed at night."
Right. And see that's where this gets sticky for bondholders, because according to the Treasury Department, dealing with El Aissami could land a corporate officer in prison for 30 years and that's after paying up to $5 million dollars in "I talked to drug lord" fines.
Also, it's worth noting that this isn't exactly the kind of guy who you want to run afoul of. For instance, at one point while studying criminology and law (which is hilariously ironic) in the 90s at Mérida’s University of the Andes, El Aissami strong-armed student elections by showing up to events with armed gangs.
After college, El Aissami would take up with Chávez as a vice minister, before becoming the country’s interior and justice minister in 2008. And that's where the fun really begins. Consider this from The New York Times:
When a prison riot shook the country in 2011, Mr. El Aissami responded by ceding more control to the restive gang leaders in an effort to end the rebellion, said Jeremy McDermott, director of InSight Crime, a research organization.
According to Mr. McDermott, who interviewed people linked to the prison system, the government began relaxing control over the prisons, which allowed gang leaders to take over.
This may have prevented more riots, but it fueled the growth of powerful organized crime rings, known as the pranes, that flourish behind bars and continue to haunt Venezuela today.
“It was one of the key moments in the development of the pranes,” Mr. McDermott said of Mr. El Aissami’s tenure as interior and justice minister.
In 2012, after four years at the ministry, Mr. Chávez appointed Mr. El Aissami governor of Aragua, a coastal state adjoining Caracas. But people interviewed there say that the influence of gangs began to grow shortly after his arrival.
Rodrigo Campos, an opposition politician from the state, says he blames Mr. El Aissami for allowing criminal groups to expand while focusing primarily on cracking down on political opponents. “He was permissive of everything that happened,” he said.
By the time Mr. El Aissami left the governorship to become vice president, the state was among the most dangerous in the nation.
With apologies to what I'm sure is a long list of victims, that is hilarious.
As you can see, it's not entirely clear that Maduro is serious about restructuring this debt because nobody in their right mind is going to be eager to fly down to Caracas and meet with this crazy bastard.
“This commission will lay the groundwork for true and transparent dialogue between the government and bondholders,” El Aissami said last week, in a televised address.
Yes, "true and transparent dialogue" - with a cocaine cowboy who, as Reuters dryly notes, "has no known experience in debt negotiations."
To be fair to El Aissami, Reuters is probably mischaracterizing this. There is no way that someone who has moved thousands of kilos of coke has "no experience in debt negotiations." In fact, it's probably not a stretch to say that when it comes to debt "negotiations", El Aissami has more experience than all of Wall Street combined. And I'd be willing to bet he drives a hard fucking bargain.
For their part, Deutsche Bank is not optimistic. To wit, from a new note:
Venezuela – Willingness finally crumbles; prepare for a messy default. Bonds markets reacted swiftly to the "historical" announcement of “restructuring and refinancing” (sic) made by President Maduro on Thursday night, with prices converging to around 30 cents on the dollar (with a couple of exceptions). In our view, the payment for the 17s being made is most likely the last principal payment investors would see out of the Venezuela complex. This is a watershed moment as far as Venezuelan bonds are concerned. Going forward, market will focus more on the recovery value and legal issues, as the long-feared "end game" has drawn near.
But who knows. Maybe El Aissami can negotiate a kilos-for-debt swap.
Assuming everyone gets a decent price at roughly $25k/key, El Aissami would need to come up with something like 2.4 million kilos to make everyone whole.
Catch more Heisenberg over at Heisenberg Report.