## Archive for October, 2009

### Here we go again: We now get a trio of PDVSA bonds

October 18, 2009

In Spanish here

No sooner had we settled the Venezuela 2019 and 2024 bonds, which investors received last Tuesday, that PDVSA announced last Friday that it would issue three bonds in a combo maturing in 2014, 2015 and 2016 with coupons of 4.9%, 5% and 5.125% respectively. Each buyer will buy a combo composed of \$1,300 of the 2014, \$1,300 of the 2015 and \$40o of the 2016. They will be sold to investors at a price of 138% in Bolivars but at Bs. 2.15.

Thus, while the whole of emerging markets countries issued around US\$ 20 billion in September and not one issue exceeded US\$ 2 billion, Venezuela began October by issuing US\$ 5 billion and now is ready to issue another \$3 billion. Of course, PDVSA could decide to issue more if it wants. Except…

that it would have to change the terms if it wants the issue to be succesful, because as it stands, buying dollars via the PDVSA bonds is more expensive than going to the parallel swap market.

Let me remind you how this works (Version for Dummies here) :

1) You buy \$3,000 in bonds denominated in \$ for Bs. In this case you pay \$3000 x Bs. 2.15 x 1.38= Bs. 8,901 for the combo

2) The bonds are not worth \$3,000 in the international markets, they sell at a discount, i.e. less than 100%. Let’s assume the combo (more on this later) sells at an average of 55% of its face value, then you get \$1,650 for your bonds if you sell them right  away.

3) Since you paid Bs. 8.901, then each \$ cost you Bs. 5.39  (8,901/1,650) which is according to the swap market value, which I am not allowed to print, more expensive than doing a permuta swap according to this page.

So, whether it is a good deal or not boils down to what is the value of the bonds in the international markets. Since the bonds don’t exist yet, we have to use other existing bonds as a guide or a guesstimate or what their price should be.

PDVSA has four bonds out there: the 2011 zero coupon Petrobono (zero coupon means no interest, you get 100% of face value on maturity) a 5.25% coupon bond maturing in 2017, a 5.375% coupon bond maturing in 2027 and a 5.5% coupon bond maturing in 2037.

The new PDVSA bonds are closer in nature to the 2011 Petrobono because in contrast to the 2017, 2027 and 2037 issues, which were issued under New York law, these bonds are all issued by PDVSA under Venezuelan law. What this means is that foreign investors don’t like them as much. For some reason, they don’t trust our Courts as much as those in New York. Wonder why?

Because the new bonds mature after 2011, the first thing we can say is that they should all yield at least the same as the 2011 bond, if not more.

Why?

Well, usually (there are exceptions that I will not go into) the longer maturity of the bond the more investors want to be paid for it. This can be understood simply as saying the longer I have to look into the future, the fuzzier it is, the harder it gets to predict.

In PDVSA’s case, if you are uncomfortable that it will pay you in 2011, imagine if you had to wait three more years! Or five!

Thus, a first approximation would be to say they all yield the same as the Petrobono 2011, which on Friday was yielding 16.8%. This is the most optimistic case. If this were the case, using Excel you can calculate that the 2014 bond would be worth 60.8%, the 2015 56.4% and the 2016 53%. Which means that you would get for the combo \$1,735.8 or you would be buying each dollar at Bs. 5.14. Does not sound that attractive, right? It gets worse…

Because this is the best case scenario. In reality these bonds should not only yield more, but when they begin trading they will yield even more as the market absorbs them. As an example, the 2019 and 20124 bonds issued two weeks ago, have always yielded at least 1% above similar Venezuela bonds and are still above them.

Additionally, the longer bonds should yield more, even if the difference is small. Using as a guide Venezuela’s bonds, the 2016 yields 0.7% more than the 2014.

Thus, I think you can assume safely:

1) The 2014 will yield at least 1% more than the 2011 because of markets and you have to add 0.35% per year. Thus the 2014 should be at 16.8%+1% (markets)+1.05% (longer maturity 0.35% per year) for a total yield of 18.85%

2) The 2015 should be 0.35% above that or at 19.2%

3) The 2016 should be 0.35% above that or at 19.55%

This gives a value for each dollar of Bs. 5.69 per US\$, 13.8% above the close on Friday.

Definitely not worth it.

Why did they do this? Because PDVSA thinks the bonds should trade higher. They are probably assuming they should trade with Venezuela’s bonds or its own New York issued bonds. But markets say this is not the case.

Thus, unless PDVSA changes the 138% factor to make it more attractive, the issue should fail. People are not dumb.

Unless there is a hidden agenda somewhere and there is always an edge with the robolution when it comes to these bond issues. I haven’t figured out where this one could be. Maybe PDVSA will start buying the Petrobonos like crazy tomorrow and drive down the yield sharply to make the comparison more attractive (Remember I am assuming Friday’s prices in all this, if the Petrobono goes up in price the numbers would improve)

We shall see, I will keep you posted. For now, stay away from this.

October 16, 2009

A few months ago I got all worked up about the terms of a loan negotiated between the Chavez Government and Lula’s Government. Essentially, Brazil’s development bank Bndes was going to lend Hugo US\$ 4.3 billion, which was going to be guaranteed by oil fields and was going to be  used mostly to pay back projects by Brazilian companies in Venezuela which were owed a lot of money.

I found the whole thing offensive, because the microphone was left on and Chavez told Lula that Brazilian companies would not be nationalized (In contrast with Argentinian ones, for example). Even worse the guarantee was in the form of oil fields, precisely where Chavez has been more vocal about supposedly protecting Venezuela’s sovereignty.

But I forgot that this is a Government incapable of completing or delivering on a project. Thus, while Chavez did talk to Lula about this and in his own imaginary word he came out and announced the details of what had been discussed, this has ended up like most Chavez projects of the last eleven years:

Nothing has happened…

You see, Brazil’s Bndes is a professionally run private Government company. It has a credit rating, has to generate revenue. Thus, if you want money, you have to justify it. And maybe they could lend Venezuela the US\$ 4.3 billion, but someone on this side would have to ask for it and justify it. Lula may back it, but if Chavez and his Government don’t do the work, just forget it. Because in the end Bndes issues bonds to raise funds for its projects and it does it in international markets, fulfilling all requirements and insuring that that its credit rating is not affected.

But according to my sources, there was simply no follow up after Chavez’ visit. Bndes would have considered a request. More so, if the money was going to go to pay Venezuela’s debt with Brazilian companies and if arranging the loan would have had a nice guarantee like an oil field Petrobras could be interested in some day.

But after Chavez left, nobody ever came back with a proposal. Not even a letter. There was absolutely no follow up. It was like hundreds of Chavez’ projects just fluff, hot air. Like resigning if there were street kids in 2003 (There are more now!). Or his recent promise to kill himself if there were poor in Venezuela in 10 years. It was just another bombastic announcement. There was not follow through or consideration for follow through. It was just…Chavez being Chavez.

So, erase my rant from May 27th., it was just another unfulfilled promised by the revolution. It was just more hot air. More of the promises that Hugo lives for and never delivers.

### Why was the Margarita Hilton nationalized?…Hugo was pissed off!

October 14, 2009

Easy…because Hugo was pissed…

Chavez was pissed off, because he had to ask for “permission” from its rightful owners (Audio here), to hold his Dictators Summit there…

In his own  Dictatorial words:

“They took possession of assets like these (Read: They built it! I have no clue how to build anything, have been trying for 11 years) and they continue to earn money there from tourism and all that (Casinos!) and they try to place conditions on the revolutionary Government (Reservations? What are you talking about? Profits? Humbug!) I do not accept it! (I am a Dictator, therefore I have temper tantrums) Then I said, let’s expropriate and there it is: Expropriated. (Jeje I am powerful, no?). And I am going to change it’s name (Hugo Chavez sounds prentetious, but I can resuscitate some unknown patriot or even my grandpa, maybe Fidel or how about my horse?)

There you have it, straight from his neurons to his tongue…Hugo, the Dictator!

(Just imagine the same mental process: “Put Cedeño in jail, I like that woman, how can she be his girlfriend?”)

### Blackouts Jorge Giordani by Teodoro Petkoff

October 13, 2009

Blackouts Jorge Giordani by Teodoro Petkoff

These guys that govern Venezuela don’t seem to convince themselves that they have spent almost eleven years trying to destroy the country. They always speak as if they had taken over barely last month. This mini reporter was listening to Minister of Planning Jorge Giordani and he could not help but jump when the Professor explained that the crisis in the electric sector and the avalanche of blackouts that is flooding the country was the result of a lack of investment. He was saying that this was part of a plan by the “IVth.” To dismember CADAFE and sell it in parts to the private sector. Imagine that, cried Giordani

Even if we suppose that such plan had existed, which never did and doubly never existed and that it was true that there was no investment at all in the electric sector in the twenty years before Chávez and that dams like Macagua Uno and Two had been born by spontaneous generation and that it was the Paez Government and not Caldera´s, the one that contracted the Caruachi dam, let’s imagine that Electricidad de Caracas never invested a cent in expanding its generation capacity, and even then- Haven’t eleven years been sufficient to revert that behavior of prior Governments? Where were you eminent planner, all of these years? Are you coming now, like a country fair charlatan to invent the wheel? You have been in charge of Cordiplan (The Ministry of Planning) for a bunch of years and it never occurred to you to to point out what you are pointing out now? Eleven years, Giordani, eleven years is what this bunch of useless and incompetent of whom you are part, have been governing the country and you still have the gall of blaming previous Governments for your own irresponsibility! No, my dear Jorge, you guys are not only responsible for the holes in the streets-that you now ant to baptize with the names of the Mayors that Chacumbuele* has put there. But the blackouts are also yours.

In fact, the blackouts have, among others, your own name, Blackouts Giordani, like Potholes Jorge Rodriguez are those that exist  in the vicinity of the street where this mini reporter is your neighbor.

*Chacumbele is a nick name Petkoff uses for Chávez , in the song Chacumbele killed himself after falling in love with a woman.

### The revolution looks to outside enemies while refusing to look at its own dramatic failure

October 12, 2009

Somehow it is difficult to adjust to the fact that the reference frame for the revolution is not that Venezuela succeed, but that the “Empire” fail. Minister Giordani, for example, spent the first half hour of his economic press conference on Thursday, telling us how out of 250 million people in the US (wrong!), 50 million had lost their homes (wrong!) and how they are now living in “tent cities”. Then he tells us how in contrast with the US where less than half of the population have social security (wrong!), in Venezuela 95% of the population does (wrong its around 20%).

But it really does not matter. These guys are proud of 27% inflation, while they predict the demise of the US\$ or the US economy, while the Bolivar has done worse in the last five years than the US\$ and the US economy is likely to grow more the last quarter of 2009 than the Venezuelan one and ditto for 2010.

And then the People’s Ombudswoman Gabriela Ramirez, the same one that rarely shows up to defend the “people” of Venezuela, holds a press conference minutes after Obama gets awarded the Nobel Prize, to tell us that this is an insult to human. rights. The truth is, she is an insult to human rights in Venezuela and organizations like Provea, who have been at defending rights for years and this is what they get. Because in the nine years since the creation of this position, Venezuelans have had two “Ombudsmen” who were more devoted to defending the Government than the rights of the people. And are quick to hold a press conference to attack Obama, but seldom talk about the horror of the daily homicides in Caracas and Venezuela.

Or take health care, for example. Chavez has revived his “Barrio Adentro” mission, because there are elections coming up. He brought 2,000 “Doctors” from Cuba to fill the empty space in the modules he installed in 2004-2004. The question is where did 7% of the GDP of the country go for three years, if so much money went to Barrio Adentro and it wasn’t even working properly. Do I hear Cuba anyone? Yes, Cuba seems to be more important than Venezuela. Or its people.

And funny how this is the same week that the Government announces electricity rationing for Caracas, for the first time in a long time, we hear that the Venezuelan Government will spend US\$ 80 million in producing electricity in Bolivia.

And obviously, Chavez was too sick to hold his variety show Alo Presidente, but had to take a poke at the Nobel Peace Prize for Obama. I mean, this is not the Physics Nobel Prize, that has gone to the best physicists most of the time. This is the Peace Prize, the same one that Arafat and Jimmy Carter won. And Kofi Annan. And Al Gore. And Oscar Arias and Rigoberta Manchu.

And yes, Nelson Mandela did win it. And Aung San Suu. But Gandi did  not, nor Havel. So how can I get upset about Obama winning it, with that track record?

Clearly, neither Chavez nor Piedad deserved it. They left their Prize in the jungles of Colombia. Uribe had a lot to do with that.He didn’t deserve it either.

But what hurts is not whether Obama won it or not. It’s that a US President did. Because the US is the enemy, the same way that China will be the enemy for Chavez in 50 years when that country becomes the most important power in the world and the most capitalist at that. Or that Cuba with its gigantic failure in 50 years, is a friend. Nobody is asking for results or consistency, just ideology.

Because what Chavez fails to understand is that Brazil and Chile in Latin America and China, Korea, Malasya, Hong Kong and all those Asian countries are becoming powers, not by following hair brained ideologies, but by embracing capitalism from A to Z, going through the H of hard work and the T of taxation.

But don’t tell our socialist brainiacs that. The President of our Central Bank, a math Ph.D. told us last week how next year they will have a priority list for CADIVI outflows by needs and by sectors. Brilliant! It has taken XXIst. Century Socialists leaders five years of exchange controls and a couple of Ph.D.’s being in charge to come out with the bright idea of having a budget. How did they ever think of that!

Maybe they should be awarded the Economics Prize for thinking of the revolutionary idea of using an Excel spreadsheet to establish priorities for giving out billions of dollars. I bet this guy gets the Venezuelan National Science prize. And I am not kidding. Write it down.

But these are the people ruling and running Venezuela. Incompetent fools concerned more about the failure of others than our own success. The same ones that justify getting rid of 27 scientists because they are retired despite the fact that they are all younger than all of the Nobel Science winners of this year, all of whom are all still active in their own countries.

But they sing the demise of the “Empire” as the local subway system has not been running in its entirety for days, electricity is going to be rationed in Caracas for the first time in decades, inflation is going to be 27% in 2009, 45 of the Venalum cells are down when the standard used to be that four was bad, two of the three most important highways going into Caracas were shut down for hours last week, the largest maternity in Caracas is running at 20% of its capacity, homicides will run at almost 15,000 in 2009…

Should I go on?

But they talk about wealth redistribution, while they all send their kids to private schools and their families to private hospitals. And they have bodyguards and fancy cars (and wish for Ferraris) and use fake statistics to prove that poverty has remained the same in the ten years of the revolution. Yes, it has improved since 2004, but did you hear oil prices went up? Or that the country’s debt soared. And all they have accomplished is to take us back to 1998. And they call it a revolution!

Meanwhile they celebrate the demise of the US as a world power and condemn Obama’s Prize.

But refuse to acknowledge their dramatic failure.

### Rainbow across Caracas

October 9, 2009

Hey! It’s Friday afternoon, long week and long weekend ahead.So, how abut this rainbow across Caracas. Pity I did not have a better camera than my phone to show 180 degrees of rainbow

### So you want to know what Chavez’ economic plan is?

October 8, 2009

I had set aside the time for tonight to write about the economic plan. The opposition did not invent it. It was first announced around the beginning of September. Both Merentes and Ali Rodriguez said that it would be announced in a week. But then Chavez went on his Dictator’s tour and everything was postponed.

Chavez was away almost two weeks, came back and said that 40 measures would be announced the week after.

Then, Hugo himself “announced” stuff that was more of “wishful thinking” than measures. I recall these:

1) An employment plan

2) CADIVI would be more efficient

3) Barrio Adentro would be reactivated

4) A bond would be issued (This one was done)

5) The swap rate would be lowered

6) Housing would be built

7) PDVSA would pay its suppliers

But Chavez also said that the number of measures in the “plan” had been upped to 54 from 40.

Then, it was announced that the plan would be announced last night, but we had another postponement. Thus, today after about 38 days, we finally saw the Ministers of the Economy together ready to announce their plan, but in the words of the Minister of Planning:

“Those waiting for a package of measures were left with their guayabera on”

Well, sorry Jorge, I did not even wear one…I don’t even own one, but I do have a wedding at the beach soon, so I will buy one.

But hell, why did they have the press conference , then?

Because all I heard was some false statistics about the US (Giordani did not even get right the population of that country and told us about the millions living in tents there). He also said that 75% of Venezuelans had social security coverage (hello?). And then he went into la-la dreamland about how wealth redistribution has improved (Did he understand the bond?) and how now people don’t take their money out of the country but reinvest it (Hold laughter please). We also heard about the GINI index, loved by Gioradnu and the Government and which has as an input the minimum salary at the official rate of exchange.

Measures on the plan?

-There will be a PDVSA bond before the end of the year.

-They will make a budget for CADIVI (after 5 years of  controls, I can only say about time)

The rest was wishful thinking and predictions for  next year’s economy and excuses for inflation.

That’s it!

There are 45 measures to go, but they may never happen at the rate we are going…but they are laughing…

### A frustrated socialist dream

October 8, 2009

Today in announcing the economic measures (none were truly announced), Minister of Planning Jorge Giordani expressed that his dream was to have not one Ferrari but three, one yellow, one blue and one red, as you can see in this video:

and then he proceeded to blast the three former and current pro-Chavez Mayors of Caracas: Freddy Bernal, Juan Barreto and Jorge Rodriguez, because his dream is frustrated by the potholes of the streets of Caracas.

Jeez, ten years in office and they have not even been able to find a Mayor that would allow Giordani’s Socialists dreams to come true.

### Carnival of the Bond Guiso

October 7, 2009

I thought I would give a bond issue reading list and include all of the excellent articles available on the many angles of this incredible scam:

The Preamble:

Should you invest? (By the Devil)

We have a bond (or two) New Issue 101

New Bonds 101 part II: Looking Good!

On the implication of issuing the debt (by Juan Cristobal):

Selling bonds, selling our future

On the scam, stew, guiso:

Quico:

The Bonos Soberanos Scam for dummies

The Devil:

An Andorran Stew: Making millions in the robolution

Venepiramides:

El guiso de las asignaciones de los bonos 2019 y 2024

### An Andorran Stew: Making millions in the robolution

October 6, 2009

The title of this post should make  no sense to most people. The word “stew” in English, does not have the same connotation that the word “guiso”, it’s Spanish translation, has in Venezuela.

Guiso means, besides stew,  scam or swindle. And that is exactly what the robolution did this week with the sale of the 2019 and 2024 bonds.

The way the whole thing was handled makes absolutely no sense, unless the whole point of the issue was to have the revolutionaries recoup their losses from the accounts frozen recently in Andorra. Thus the title “An Andorran Stew”.

Recall that the issue had two objectives:  One, to have the Government raise money for its expenses. Two, to help lower the swap parallel exchange rate.

Let’s see how well these goals were met:

Obviously the Government raised money. What began as an issue of US\$ 3 billion ended up being increased to US\$ 5 billion, sold at a price of Bs. 3.01 per US\$. (Bs. 2.15 times 1.4 times 5 billion dollars).

The problem is that these bonds are selling at an average of 68% of its face value today (Dropping fast!). Thus, if you bought US\$ 1000 of the bonds, you paid Bs. 3,100 for \$680, so you really paid Bs. 4.43 per US dollar. This is 19.4% below where the parallel swap market was today.

Thus, you may ask: Why did the Government sell it so cheap if one of its goals was to raise lots of Bs. for its expenses? This clearly makes no sense whatsoever. People would have been willing to buy the bonds at a much higher price. In fact, the Government sold the bonds at auction, with prices between 135% and 140%. But it could have easily thrown in some uncertainty and made the range higher. This would have given it lots more Bolivars, after all, people just want to buy dollars and they would do so even at a small discount to the parallel swap market. 19.4% is simply absurd!

Thus, the first goal was met, but the Government could have generated lots more Bolivars very easily, rather than giving the bonds away on the cheap.

But if the first goal was met only half way, the second was simply missed completely. The biggest buyers in the swap market are corporations. They are the ones that move it. Not individuals, not small corporations, but the large importers. Thus, you would expect them to be treated at least equally well in the allocation of the bond. Or even treat them better if what you want is to lower the swap rate.

This is what happened in the allocation:

a) Individuals with orders below or equal to US\$ 499,000, received 100% of their orders. Individuals with more than this amount received US\$ 500,000.

b) Companies with orders up to US\$ 999,999 received the full amount. Companies with orders above that received zero, nothing, zippo.

c) Orders from banks up to US\$ 20 million received 100%. Orders from brokers up to US\$ 8 million received 100%. Above that, zero.

These allocations make absolutely no sense if your purpose was to provide dollars to importers. They were completely left out!

In fact, banks and brokers have no need for US\$ other than sell them to their clients, so by giving them such large amounts you gave them about Bs. 1 for each dollar they received. Nice profit if you knew what to ask for. In the past banks and brokers have usually been left out. As it should be.

By giving 100% to orders below half a million dollars for individuals, speculators, and of course, those in the know, maximized their profits. And this is they key, the allocation was so unlike the objective of the bond, that this had to be designed so that those in the know made a lot of money.

Add to that the fact that not everyone deposited the money, as required by the Government, and the profits can simply be staggering if you were in the know. And it was a great deal for everyone. If everyone sells their bonds today at current prices, the total profit was around Bs. 5 billion or about US\$ 680 million dollars, about US\$ 27.2 per Venezuelan inhabitant. To finance capital flight? Huh?

If you did have the money, as I suggested you do to go to the bond, you made 19.4% in about ten days. Those that didn’t put anything made, of course, an infinite return, and those in the know, surely made up at least part of their Andorran losses, when their account were frozen.

And remember: don’t hold on to the bonds too long, with a US\$ 5 billion issue flooding the market (and more coming?), I would be very surprised if bond prices held up. You did not buy the bond to hold onto it, you bought it to purchase foreign currency. Don’t fall in love with the bonds!

Oh yes, and the country’s debt increased by US\$5 billion so that all of this could happen…