CSFB aids Venezuela with 2-part debt deal

Latin American revolutionaries are celebrated more by Hollywood than by Wall Street. But Venezuela's populist president, Hugo Chavez, is winning investor cheers just ahead of a potential referendum on his rule. That's thanks to a script written for him by investment bankers at Credit Suisse First Boston.

Last week, CSFB bankers completed an unusual two-part debt restructuring for Venezuela, which until recently was burning through cash reserves due to a severe contraction of its economy. The energy-rich nation sends three-quarters of its oil to the USA. But it has struggled amid domestic political opposition to Chavez and barely disguised disdain from the Bush administration.

Tensions peaked in December and January when a national strike halted oil production. Now, the administration and its opponents are negotiating a referendum on Chavez's rule sometime after Aug. 19. If Chavez loses that vote unlikely, despite strong opposition he would be replaced by his vice president.

Until now, CSFB closely guarded the details of the investment deal, in part because the bank planned to target Chavez's primary opponents the country's bankers and business executives to buy new securities it underwrote for the Chavez regime. This approximately $1.5 billion in new debt, marketed only to Venezuelans, was sold last week to pay off older, high-yielding foreign debt known as Brady Bonds.

CSFB might also have wanted to keep the terms quiet because of how the bank benefited. Not only did CSFB collect standard fees and commissions from structuring the investment, it also unloaded one-third of its own holdings of Venezuelan Brady Bonds (named after a prior debt-reduction plan devised by former U.S. Treasury Secretary Nicholas Brady in the late 1980s) by selling them back to the Venezuelan government.

According to interviews with the CSFB bankers and the privately circulated prospectus, a copy of which was obtained independently, CSFB owned $390 million in Venezuelan Brady Bonds before the restructuring. Those bonds had a market value of $125 million. CSFB bankers acknowledge they sold about $40 million of the bonds back to the Venezuelan government for cash raised by the new debt.

Some Wall Street competitors who asked not to be identified criticized CSFB for what they described as a conflict of interest. But CSFB bankers denied a conflict, noting they disclosed the holding in the prospectus.

Michael Schoen, CSFB's managing director of Latin American debt capital, said Thursday, "The reality is Venezuela has borrowed 7-year money at 53/8% with cash flow savings of $1.4 billion over four years. It doesn't get much better than that." Venezuela's total foreign and domestic debt is about $30 billion.

Frank Lopez, CSFB's managing director of Latin American investment banking, said, "Venezuela has faced a difficult debt-payment schedule since 1998-1999. We've been working closely with the administration whoever's been the minister of finance to come up with creative solutions to their external debt."

Lopez said the time for such a deal was right due to a recent improvement in Venezuela's cash-flow resulting from increased domestic oil production and prices, and relative political calm.

But the deal was attractive to Chavez's opponents because the bonds were priced in U.S. dollars at the official exchange rate of 1,600 Venezuelan bolivars at a time when the country's black-market rate is closer to 3,000 bolivars.

Even if Venezuela's currency were to be devalued, the bondholders would be protected.

That doesn't provide Chavez's predominantly poor supporters with much succor. But it does give Chavez time to consolidate his political position before the referendum and continue his populist reforms.

Fred Jaspersen, director of the Institute of International Finance's Latin American Department in Washington, says, "The fact the deal was done strengthens his position

Chávez's school plans ignite furor in Venezuela ***New history texts for fourth- and sixth-graders published in 1999 praised Chávez's coup attempt and branded as ``corrupt oligarchies'' the two parties that ruled Venezuela since the late 1950s, Democratic Action and COPEI. Chávez has also greatly expanded a system of paramilitary classes in public high schools that had long been on the books but were seldom held, portraying them as ``the founding stones of the new Venezuelan man.''

``He is promoting militarism, infecting texts with viruses that foster class hatreds ... and speak against globalization and privatization,'' Raffalli said in an interview. Chávez recently signed a deal with Cuba under which Havana will train Venezuelan teachers and provide educational materials, and Education Minister Hector Navarro last year approved a nationwide essay competition on the life of Argentine-born Cuban revolutionary Ernesto ``Ché'' Guevara.***

Hugo Chavez - Venezuela

This is incredible. Michael Schoen, CSFB's Managing Director for Latin America, and obvious George Soros wannabe, restructures a deal that will bring misery to the democratic forces in Venezuela and is proud of himself.

One might ask, where the hell is the State Department in all this. However, you have to recall that Colin Powell does not want to be bothered by problems he knows nothing about. So Latin America drifts farther and farther to the left every day.

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