Archive for April 29th, 2009

PDVSA zero coupon bond rumor: makes sense, but does it? (And two bits on the Central Bank and bonds)

April 29, 2009

Rumors are rampant that PDVSA will issue a two-year zero coupon bond which would be sold to local investors for local currency. The issue would attack two problems: One, it will give PDVSA local currency to pay off contractors, suppliers and salaries. Two, it will supply the parallel market with US$ 2.5 billion and will help hold it down for a while.

While Minister of Finance Rodriguez denied that PDVSA had the authorization to do it, there has to be some truth to it, because some parts of it make sense. For example, making it a zero coupon is sensible, as this means that the company will have no interest costs. Two years makes some sense, but three would be best. Why? This bond, if true, would mature in 2011, but there is already a maturity for one of the country’s bonds in 2011, for US$ 1 billion that year, that would mean that US$ 3.5 billion in Venezuela and PDVSA bonds would be due that year. Fine if oil prices bounce back, but no so great if they don’t. So, 2012 would be best.

But once one gets into the details, things get murkier. Foreign investors prefer sovereign risk than PDVSA risk. Thus, while at first sight a yield of 14-15% might be what investors would demand, it may be higher initially. The second problem is that it is likely not to have much of an impact on the swap market right now, except for the psychological impact initially. This is because US$ 2.5 billion is likely to be sold in little pieces to thousands of small “investors’, which does not attack the problem of corporates that need foreign currency for imports. Thus, the bonds will likely end in the hands of those looking to make some money, rather than satisfy the swap market needs. Moreover, those same corporates have needs that exceed the US$ 2.5 billion anyway.

What would seem to make more sense is to say the country (not PDVSA) is buying back the 2010’s and issuing US$ 4 billion of longer terms bonds with a low coupon. But clearly this is not what the Government is thinking. It would certainly be a strange transaction, if true, as a zero coupon issued by PDVSA. Think about it, suppose the Government wants to sell the bonds at an implicit swap rate of Bs. 4.3, which is what optimists are saying in Caracas. Then, let’s say the bond would sell in world markets at 70% of its nominal value, to give a yield of 13-14% more or less. Then, this would mean that it has to be sold to local investors at 140-150% of its nominal value. That is, if you buy a million dollars, you pay (1.4 x 2.15)=3.01 million Bolivars for it. But once you have the bond you sell it for (0.7 x 1 million or 700,000 dollars which means you pay 4.3 Bs. (3.01/0.7) for each dollar you get. I wonder how may bonds have been sold in a primary market with such a premium in history. If PDVSA sold them at an implicit rate higher it would have to be even higher. Weird no?

I hope my numbers are right, I don’t even want to use a calculator on my vacation and doing things from memory.

And speaking of numbers, how about Mathematician Nelson Merentes becoming Head of the Venezuelan Central Bank? Chacon is Minister of Science and Merentes President of the Central Bank, it’s hard for things to get weirder than that. When I met Merentes in the 90’s he had no clue what a spread was, I do hope he reads my post on Central Banks in early February and knows his is bankrupt and what it means.

And since we are on the subject of bond, the revolution that claims to defend the country’s sovereignty so well, approved yesterday, via the National Assembly, that bonds can be issued with collateral of Government property. This would be a first. Supposedly, this is being done so that CVG, the corporation that manages companies in Guayana, can issue bonds guaranteed by its gold production. Truly amazing when you think about it, CVG does not even have audited financial statements.

It is indeed a revolution, a clueless one at that.