CANTV: Venezuelan ADRs Shunned Amid Exchange Controls: Taking Stock

Caracas, May 20 (<a href=quote.bloomberg.com>Bloomberg) -- CA Nacional Telefonos de Venezuela lost Globalvest Management Co.'s Graham Makohoniuk as an investor after saying it wouldn't be able to pay dividends to foreign shareholders because of currency restrictions.

``We thought that it would only be followed by more bad developments,'' said Makohoniuk, whose Virgin Islands-based firm manages $500 million in Latin American equities. Globalvest had owned American depositary receipts of Nacional Telefonos, the country's largest telephone company.

The firm's sale of its holding illustrates the difficulty that Venezuelan companies have faced in attracting investors ever since President Hugo Chavez limited businesses' access to dollars in February, after a two-month national strike.

Six of the 13 companies whose shares trade in the U.S. as ADRs had to stop making dividend payments to overseas investors because they couldn't get the dollars. The others didn't provide any payouts, or else they also would have been affected.

FTSE Group, whose indexes track the performance of stock markets in 49 countries, removed Venezuela this month from its All- World Index, a benchmark for global fund managers.

The straw that broke the camel's back was the exchange controls,'' Peter Wall, the senior vice president of business development for FTSE Americas, said in an interview. Countries have to meet some standards of investability, and one of those is the relatively free flow of capital out of the country.''

Most-Traded Stock

Chavez imposed the restrictions in an effort to protect foreign-currency reserves after the strike curbed exports from Venezuela, the U.S.'s fifth-largest supplier of crude oil. The walkout, aimed at removing him from office, followed a failed two- day coup in 2002.

Since Chavez took office in February 1999, the country's economy has fallen into recession twice, the bolivar has lost about 65 percent of its value and the benchmark IBVC stock index has dropped 33 percent. This year, the economy will contract 17 percent, according to the International Monetary Fund.

Nacional Telefonos has been most hurt by the exchange limits because it is the country's most-traded stock, accounting for 85 percent of trades on the Caracas Stock Exchange on some days.

The company's ADRs, each representing seven shares, fell to $10.21 yesterday from a record $49.38 in September 1997, a year before Chavez was elected. This year's trading has averaged 222,400 daily, about one-quarter less than the average for all of 2001.

This year, the ADRs have closed as much as 17 percent below the value of the underlying shares. The discount compares with an average 1.4 percent premium last year before the beginning of the strike, which closed the country's stock exchange.

`Waiting for Dollars'

Nacional Telefonos has deposited bolivars with Bank of New York, manager of its ADR program, for a dividend payment to the holders of record on April 9. The company needs permission from Venezuela's foreign exchange commission to convert them to dollars and pay shareholders.

``We are waiting for dollars to be approved,'' Chief Financial Officer Armando Yanes said two weeks ago in a conference call with analysts.

The commission hasn't made the U.S. currency available for dividend payments. Only importers of food and medicine have been able to buy the currency. Finance Minister Tobias Nobrega said yesterday that he asked Chavez to ease the limits on buying dollars to help companies speed imports.

Mercantil Servicios Financieros, the holding company of the country's largest bank, has also been unable to make cash payouts as a result. So have Banco Venezolano de Credito, the country's ninth-largest bank, paper manufacturer Manufacturas del Papel CA, and container maker Dominguez & Cia. Steelmaker Siderurgica Venezolana Sivensa has paid a share dividend.

`Difficult to Receive'

Dividend payments are a key reason for buying shares of Nacional Telefonos, said Miguel Octavio, executive director at BBO Financial Services Inc., whose mutual funds hold the stock.

Payouts during the past 12 months total 16.5 percent of the ADRs' current price. That's about four times the yield on Verizon Communications Inc., the biggest U.S. local-telephone company and owner of a 28.5 percent stake in Nacional Telefonos.

Nacional Telefonos may pay a dividend of about $1.70 on each U.S.-traded share this year, Octavio said. The telephone company promised to pay out half of its free cash flow, a profitability measure, as dividends after an unsuccessful takeover bid by AES Corp. two years ago.

``Exchange controls make it difficult to receive the dividend,'' said Urban Larson, who manages about $250 million of Latin American stocks at Baring Asset Management in Boston. Larson sold all his Nacional Telefonos shares in February 2002 and the rest of his Venezuelan stocks last year.

Investors have shunned Venezuelan companies that don't pay dividends, such as Corimon CA, the only company besides Nacional Telefonos to trade on the New York Stock Exchange.

`Catalyst Is Diminished'

Corimon lost its listing this month after its market value dropped below a $50 million minimum. The paintmaker's ADRs fell to about $6 at the time of the delisting from a high of $47.45 on Feb. 21, 2001.

The companies that aren't paying dividends are paper maker Venepal SACA, textile maker Sudamtex de Venezuela CA, ceramic maker Ceramica Carabobo CA, power company CA Electricidad de Caracas, real estate developer Mantex SACA and real estate company Fondo de Valores Inmobiliarios SACA.

Venezuela's ouster from the FTSE All World Index has given international investors even less reason to invest in companies based there.

``There is no denying that the propulsion, the catalyst is diminished'' when a country is removed from an index, said Bill Rudman, who helps manage as much as $70 million in Latin American equities at WestLB Asset Management in London.

Rudmman's funds use indexes from Morgan Stanley Capital International, an FTSE competitor, as benchmarks. MSCI is now ``monitoring the situation,'' said Remy Briand, a member of the firm's index committee.

Venezuela is still part of MSCI'S All Country World and emerging markets indexes. Money managers who oversee $3 trillion globally use MSCI's indexes as a benchmark. The total exceeds the $2.5 trillion for FTSE's measures. Last Updated: May 20, 2003 00:01 EDT