Archive for March 12th, 2008

Piensa mal y acertaras: PDVSA buying back EDC’s 2014 bond

March 12, 2008

There is a local saying: Piensa mal y acertaras (Think the worst and you will be right) and the announcement by PDVSA that it was buying back Electricidad de Caracas’ 2014 Senior Notes or Bonds reminded me of this criollo saying.

You see, Electricidad de Caracas was taken over less than a year ago by the Venezuelan Government and the company had this bond with a 10.25% coupon maturing in 2014 and in the amount of US$ 260 million. The bond can be called back in October 2009 at a price of 105.125%. Thus, as of last Friday the bond was priced at 108% and was yielding around 8%. This may sound great to most fixed income investors in the world, except that PDVSA 2017 is yielding 10.6% and PDVSA happens to be the owner of Electricidad de Caracas, so the 8% makes little sense, simply too low.

By decree, Electricidad de Caracas will cease to exist in May 2010, when it is merged with the National Electric Company (CNE in Spanish, no pun intended in terms of funny business going on). Thus, logic would dictate that the bond would be called back at 105.125% in October 2009 and that would be the end of that.

Except that nothing is what it seems in the robolution. The first strange thing is that the day that the ExxonMobil injunction came to be known, PDVSA 2017 bond dropped by almost 10% points, while the EDC bond barely moved from 108% to 107%. Same company and the lower yielding bonds moves less, weird no?

Then last Friday, the long rumored buyback of the bond is announced by PDVSA. The price? Well, with a 10.5% coupon and call feature at 105.125%, you would think a price in the low teens (111%-112%) would be more than necessary and reasonably priced for PDVSA to do a buy back. But no, the price is somewhere between 119-120%, which makes little sense. At that price the yield to maturity to the first call is 1.6%, a truly ridiculous value.

So, the owners of this bond will get about 120% by April 9th. and they can take their money and invest it in PDVSA 17 at 10.6% if they trust that risk. Not a bad deal after all.

Of course, if you read the legalese associated with the buyback, it reads something like: “PDVSA will buy it back at 105.25% plus an early consent fee of 2%, plus the future value of all cash flows up to the earliest redemption date, discounted at a rate equals to the yield of the US Treasury Bond which matures on October 15, 2009 plus 50 basis points”. Which if you have an MBA and sa good spreadsheet you can interpret means 119-120% depending on the mysterious yield of that Treasury Bond.

So, there was no rush to buy it back, the price is extremely high for what you would expect and even compared to the country’s yield. To Top it all off, the bond was already trading at a high price.

Yeap, there is no question about it: Piensa mal y acertaras!, This is after all called the robolution.

(Note: The author holds Electricidad de Caracas notes and he will benefit from this peculiar largesse of the robolution. The poor of Venezuela I can assure will not)