July 31, 2017 / 1:27 PM / a year ago

UPDATE 3-Venezuela dollar bonds fall on US sanction fears after election

(Adds detail on U.S. sanctions, investor comment)

By Sujata Rao and Dion Rabouin

LONDON/NEW YORK, July 31 (Reuters) - Venezuelan dollar bonds were slightly lower on Monday after a controversial weekend election for a legislative super-body that could open the door to fresh U.S. sanctions, including measures targeting the country’s crucial energy sector.

The election was boycotted by the opposition, which said it was rigged to significantly increase President Nicolas Maduro’s powers. That view was shared by the European Union, United States and a number of Latin American neighbors.

The U.S. government on Monday sanctioned Maduro, freezing all his U.S. assets and barring Americans from doing business with him.

No restrictions on the country’s oil industry were included, but such measures are still under consideration, congressional sources and a person familiar with the situation told Reuters.

“To immediately put a stranglehold on by limiting the country’s ability to export oil day one (after the vote) runs the risk of creating a power vacuum and thereby increasing the possibility that Venezuela becomes a security threat in the region,” said Christian DiClementi, emerging markets debt portfolio manager at AllianceBernstein.

“I think the U.S. administration is savvy enough to understand that, which is why you’re seeing the type of sanction that you’re seeing today.”

Venezuela’s benchmark sovereign bond maturing 2038 fell almost 1 cent in early trading but snapped back to trade at around 40 cents on the dollar. It stayed above 13-month lows hit on Friday, Thomson Reuters data showed.

Dollar bonds issued by state-owned oil and gas company PDVSA fared worse, with its benchmark 2037 bond falling as much as 1.3 cents and the 2021 issue dropping 0.4 cent .

Investors told Reuters that if bond prices were to fall to below 30 cents on the dollar they would become attractive investments as a default or restructuring would likely result in new bonds valued at a level higher than that.

PDVSA’s benchmark 2037 bonds were trading just below 33 cents on the dollar.

Venezuela, rocked by deadly protests almost daily and suffering a humanitarian catastrophe with shortages of food and medicines, has steadfastly kept up payments on its bonds, some of which carry double-digit coupons.

Many investors continue to hold on to the debt in the belief the government will stave off default for a while. The bonds have performed poorly in 2017, however, down around 10 percent year to date.

Some investors see a default as more likely and believe it could mean Maduro’s regime would be ousted, an event they see as a long-term positive for bond value and rate of recovery in a default.

Data from IHS Markit shows that the credit default swaps market assigns Venezuela a 92 percent default probability in the next five years but only 42 percent in the next six months.

“A lot of the bond prices ... are pricing in that U.S. actions lead to a default in Venezuela,” said Jared Lou, Portfolio Manager EMD Hard Currency at NN Investment Partners. “That still may be the case but it depends on if sanctions and actions are ratcheted up even further as to when that actually occurs.”

Moody’s Investors Service released a note Monday saying that Venezuela would be able to service its debt this year only if it “reschedules large payments.” The country will have a total $725 million in debt payments to service over the coming month.

Moody’s also said that it does not expect harsh sanctions on Venezuela’s oil sector from the United States and that even those would be unlikely to induce a change of regime.

“Actions targeting the energy sector could adversely affect U.S. Gulf Coast refining activity and the U.S. more broadly, since Venezuela is the U.S.’s third-most important oil provider,” said Moody’s senior credit officer Jaime Reusche in a note.

“If any such targeted sanction were to be introduced, it would likely hasten a default event, but the effect on regime change would be limited unless the armed forces rebel against the current government.”

Reporting by Sujata Rao in London and Dion Rabouin in New York; Editing by Catherine Evans and Bill Rigby

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