Venezuela Stocks, Bonds Sink on Chavez's Nationalization Plans

By Guillermo Parra-Bernal and Alex Kennedy

Jan. 9 (Bloomberg) -- Venezuelan stocks had their biggest drop on record and bonds tumbled after President Hugo Chavez pledged to nationalize the country's largest phone company and utilities.

Shares of Caracas-based telephone company CA Nacional Telefonos de Venezuela, or Cantv, plunged 28 percent in U.S. trading to $12.20. The local shares, which account for almost a fifth of the Caracas Stock Exchange Index, didn't trade in Caracas until about 15 minutes before the close of trading, then fell 30 percent, their biggest drop ever. Trading of Electricidad de Caracas, the nation's largest private power company, was halted in the morning after the shares slid 20 percent.

Chavez's threat yesterday to take control of ``everything that was privatized'' went beyond what investors had anticipated, sending the stock exchange index down 19 percent. Foreign companies with operations in Venezuela, including power company AES Corp. and steelmaker Ternium SA, also fell.

``Nobody knows what's going to happen so investors are assuming the worst,'' said Urban Larson, who helps manage $2 billion in stocks in emerging markets assets at F&C Investments in Boston. ``Some markets are riskier than others, and it's been clear for some time that Venezuela is riskier.''

A drop to an 18-month low in the price of oil, Venezuela's biggest export, added to declines in the country's stocks and bonds. Crude oil for February delivery fell 45 cents, or 0.8 percent, to $55.64 a barrel on the New York Mercantile Exchange, the lowest close since June 15, 2005.

Yields Rise

The yield on the government's benchmark 9 1/4 percent dollar bonds due in 2027 rose to a one-month high of 7.05 percent. The yield has jumped 39 basis points, or 0.39 percentage point, since Jan. 3. The bond price, which moves inversely to the yield, fell 0.95 cents on the dollar to 123.7 cents, according to JPMorgan Chase & Co. The bonds now yield 2.34 percentage points more than similar-maturity U.S. Treasuries.

The yield on the 6.25 percent so-called Interest and Principal Protected bonds, due April 2017, fell to 3.99 percent from 4.02 percent yesterday, according to Banco Bilbao Vizcaya Argentaria SA. The price, which moves inversely to the yield, rose to 119, the highest in three weeks. The TICC. which is dollar-denominated and traded in the local market, offers currency protection.

An index of Venezuelan ADRs fell 35 percent. U.S.-traded shares of Ternium, a Luxembourg-based steelmaker with mills in Argentina, Mexico and Venezuela, fell $1.07, or 3.9 percent, to $26.38. Ternium is controlled by Argentina's Techint Group.

Shares of Canada's Crystallex International Corp., which is developing Venezuela's biggest bullion deposit, fell 37 cents, or 9.2 percent, to C$3.66, after falling 9.4 percent yesterday. Arlington, Virginia-based AES Corp., which owns an 85 percent stake in Electricidad, fell 86 cents, or 4.1 percent, to $20.16 in New York.

Suspended

Trading of both Cantv and Electricidad, known as EDC, will be suspended for the next two days, Fernando de Candia, the nation's stock exchange regulator, said in a statament. The drop in the index is ``temporary,'' he said.

President George W. Bush's administration urged Venezuela to compensate U.S. companies that would be affected by Chavez's plan to transfer the country's utilities to state ownership, White House spokesman Gordon Johndroe said.

``Political risk clearly reached a new peak after all this,'' said Claudia Calich, who manages $900 million in emerging market debt for Invesco Inc. in New York. ``Investors will be very attentive to upcoming announcements.''

The plunge in the index, the biggest since Bloomberg started tracking it at the end of 1993, will be temporary, Ex-President Carlos Andres Perez sold Cantv to a group of private investors led by GTE Corp. in 1991, a year before Chavez became a national figure by trying to overthrow Perez.

Political Ceremony

Chavez, speaking from Caracas as he swore in new cabinet members, pledged to exert greater control over the oil industry. Chavez, a 52-year-old former lieutenant colonel who has clashed with U.S. President Bush, won re-election to a new six-year term last month.

Chavez's plans may result in further declines in investment in an economy that, after growing 10 percent each of the past three years on the back of rising oil prices, risks overheating. Since 1999, manufacturers have trimmed spending on new plant and equipment to the point that non-government investment equals no more than 4 percent of gross domestic product, one of the lowest in the region.

The plan also risks making the economy of Venezuela more dependent on oil. The Chavez administration has benefited from oil prices that averaged more than $60 a barrel last year, compared with about $15 a barrel when he first won office in 1998.

``If Chavez chooses this path then we'll see a flight of capital away from bonds and Venezuelan assets in general,'' said Luis Costa, an emerging market debt strategist at ING Groep NV in London. ``Foreign investors will become scared of developments.''

`Strategic'

Chavez yesterday said that ``those sectors that are so strategic, such as electric power, everything that was privatized, will be nationalized.''

Nationalization would probably be the biggest step toward reversing the legacy of previous governments that privatized companies and opened Venezuelan markets to foreign investors. It would add to restrictions in foreign-currency trading Chavez first imposed in early 2003. Banks endure interest-rate caps in Venezuela and phone, power rates and rents are also controlled.

The perceived risk of owning Venezuela's bonds surged today. Credit-default swaps based on $10 million of the nation's U.S. dollar-denominated bonds jumped 9.7 percent to $169,000 from $154,000 yesterday, according to data compiled by Lehman Brothers Inc. An increase in price indicates deterioration in the perception of credit quality; a decline suggests improvement.

Unregulated Trading

The currency, which the government sets at an exchange rate of 2,150 bolivars per dollar, was bought today about 4,000 per dollar in unregulated trading, said Nelson Corrie, a trader with Interacciones Casa de Bolsa CA in Caracas. The government, under current restrictions, is the only entity allowed to buy and sell foreign currency.

The possible nationalization of Cantv may deprive Venezuelans of a means to withdraw money from the country. Since 2003, investors realized they could legally acquire dollars by buying the company's local shares, converting them into ADRs and selling them abroad.

``Portfolio investors should try to find an exit,'' said Richard Segal, head of research at Argonaftis Capital Management in London. ``Chavez has been trying to do this for a long time and he felt that the latest presidential victory for him gives him that mandate.''

Venezuela, a founding member of OPEC, is the world's fifth- largest oil exporter.

Joint Ventures

The energy ministry said yesterday that four joint ventures may be nationalized; the government has been negotiating to give majority control of them to state-run Petroleos de Venezuela SA while leaving a minority stake with foreign owners including Exxon Mobil Corp., Chevron Corp., Total SA, ConocoPhillips, BP Plc and Statoil ASA.

``We are in constant contact with Venezuelan authorities and the word `nationalization' is not a word we've been confronted with yet,'' said Peter Mellbye, Statoil's head of international operations, in an interview today. Total spokesman Paul Floren and BP spokesman David Nicholas declined to comment on Chavez's statements.

Chavez also said he will seek to strip the central bank of independence from the government. ``The central bank shouldn't be autonomous,'' Chavez said. ``That is one of the biggest mistakes of the constitution.''

Speaking to reporters today in Caracas, outgoing central bank Director Domingo Maza criticized Chavez' decision. Maza's term ends this month.

``The central bank must be autonomous. Otherwise, the people will lose confidence in the currency,'' Maza said in an interview on Globovision television station.

To contact the reporters on this story: Guillermo Parra-Bernal in Caracas at at gparra@bloomberg.net

Last Updated: January 9, 2007 16:21 EST