If it were not absurd enough that PDVSA was thinking of issuing US$ 2 billion in bonds, today’s rumour du jour was that the bond was coming and it was going to be for US$ 3 billion, just to make things even more entertaining.
Now, it will be easy to sell US$ 3 billion of this supposed bond to Venezuelans, that’s the simple part, the tough road ahead is for all of these Venezuelans to be able in turn to sell the bond abroad to international investors, if that is what is coming as rumored locally and strongly today.
Let me try to explain the problem. Venezuela has some US$ 24 billion in bonds already trading in the international markets and PDVSA has another US$ 7.5 billion.
Who buys these bonds?
Mostly international funds interested in either making money by collecting the interest payments from the bonds or by speculating that the price of the bond will go up in the near future. These funds are limited in size and number because Venezuela does not have a good credit rating. Venezuela’s rating is currently at BB- while PDVSA’s is at B+. This says if things get tighter PDVSA will have a hard time paying.
In this market, prices are set by supply and demand. If there are lots of sellers, prices go down and viceversa. Additionally, it is not an infinite market, the market is right now somewhere between US$ 50 and US$ 100 million each day.
Currently Venezuelan bonds are yielding around 12-16% depending on when they mature, i.e. when they have to be paid. Let’s take a simple example, the shortest Venezuelan bond, the 2010, has a coupon of 5.375% per year, that is, you get paid twice a year half of that on the amount you hold.
Let’s say you have 100,000 dollars, you get US$ 5,375 per year in two installments on August 7th. and February 7th. and the bond matures (ends or has to be paid by Venezuela) on August 7th. 2010. Currently that bond costs around 93% of its nominal value, which means to buy $100,000 of the bond, you pay 93,000 dollars.
Thus, if you buy it tomorrow, between now and its maturity there are around a year and 40 days of interest. But in addition you will get 100,000 dollars at maturity, for your 93,000 dollars investment. That means you will make around US$ 7,000 for the increase in price and another 5,375 dollars plus 40 additional days which is like another 500 bucks. So, you get a total of roughly 12,875 dollars on your 93,000 investment or around 12.7% annualized.
So, now PDVSA will issue a two year bond, supposedly a zero coupon, i.e. it pays no interest but just appreciates in value to 100% at maturity. Based on when the Venezuelan bonds are trading today, it should yield 15%. That is, roughly it should sell in an ideal world at 70%, so that it gives you 15% a year, since you will gain 30% in two years.
Thus, the Government will sell you the bond at around 190% at Bs. 2.15 per US$. This means that if you order US$ 100,000 (and are lucky enough to get it), you pay Bs. 419,000 (195% x 2.15) for each US$ 100,000, then if you can turn around and sell it for 70,000 dollars, then each dollar you get cost you (419,000/70,000)=Bs. 5.98 for each dollar you got.
However, this is the real world. If the Government sells US$ 3 billion that corresponds to the volume (additional volume at that!) that is done by the market each 30 days, so it would take at least a month and half in terms of working days to absorb the full amount, if everyone in Venezuela turned around and sold them Thus, there is too much supply and not enough demand. Which means that the equilibrium price will not be 70% but lower, or the yield to maturity will be higher.
But suppose you are a fund that owns the 2014 Venezuela bond which yields 16% and all of a sudden the 2011 “new” PDVSA bond yields 18%, you quickly sell the 2014 and buy the new Pdvsa bond. But if too many people do this, the price of the 2014 Venezuela bond will then also go down in price.
Get the picture? By selling US$ 3 billion of the two year 2011 zero coupon, the bond itself will likely yield more than the typical Venezuelan bond due to the over supply, which will make people sell all the other bonds to buy the new one.
Now, under normal circumstances that would be ok, except that Venezuela’s yield is quite high already!
Now, the interesting part, is that if the PDVSA bond 2011 dropped below 65% of its price, or a yield of 17%, it would be cheaper for you to buy the foreign currency in the swap market on Thursday at Bs. 6.4 per US$, than pay Bs. 419 thousand for 100,000 dollars of the bond which will sell at 65%.( (Bs 419,000/65,000)=6.44 per US$)
It seems to me to be a little close for comfort. So, my recommendation is that when conditions are announced, you do the math and likely the best option available would be to just go and buy the dollars in the swap market, this may be the last chance to buy foreign currency so cheap at Bs. 6.4 per US$ or lower.
The strange thing is that PDVSA does not need dollars, it needs Bs. which it will get. But why they want to sell a bond in dollars is what I do not quite understand. Why not sell and indexed bond in Bs.? After all, even if the swap market goes down with this new dollar bond, it will be only very temporary and people will forget that it even wnet down, let alone lower prices of products.
As usual, there has to be a trick somewhere. What it is may not be known, if at all, until the bond and its characteristics are announced. Or it may be that the conditions to sell you the bond are such that there is some specific and particular way for someone to make a few million bucks from the bond.
They don’t call it the robolution for nothing!!!
The Devil's Excrement 
July 6, 2009 at 9:32 pm
Finally, PDVSA said that they did not sale bonds at a premium lower than 75% because of the speculative content of the offers in that range (http://bonosvenezuela.blogspot.com/).
I think that deserves a standing ovation
Well, I think I should not be so harsh on them because they really know how to make money at the expense of people that buy stuff they don’t know about.
July 6, 2009 at 9:20 pm
Brother,
Let me first congratulate you on your clear explanation. I believe every Venezuelan that bought some of these bonds today is thinking exactly the way you are thinking now. In fact, right now they are feeling real good because they bought the bond at an average 180% their face value.
However, very soon they will find out THEY MADE THE WORST INVESTMENTS they could have ever made (unless Chaves has a major stroke and ends up loosing his speech capacity before 2011). I will explain why. But lets first have a look at the fine print
According to the ‘terms and conditions’ the value of the bonds is calculated at the official exchange rate and the bonds have to be bought and redeemed in Bs (Bs is Bolivares, Venezuela’s currency; very well named if you think about its acronym in English “BS”).
The implications of the previous paragraph are very serious for the investors that as today bought US$ 1.5 bn 😮 or should I go 😥
Considering that the Venezuelan government regulates the exchange of currencies in the country and doesn’t freely sale dollars and penalizes the private exchange of foreign currencies in the country. And that’s exactly the reason for buying bonds that are trade-able in other countries
This means that you just bought bonds at 80% premium and in 2 years you are going to get your money back in Bolivares (Bs) and not in dollars ($) as you expected. You paid the premium to get the dollars, but you won’t.
Personally I think the bond should had been sold by PDVSA at between 70 and 80% face value (at a discount) and should soon star trading in the bonds markets outside Venezuela starting at less than 25%. But that’s just my opinion….
June 24, 2009 at 8:23 am
Miguel… just and update to the Iranian soccer team post
http://edition.cnn.com/2009/WORLD/meast/06/24/iran.football.protest.retirements/index.html
Iranian football stars ‘retired’ after match protest
Four Iranian footballers have been “retired” from the national side after protesting against the contested election result in the country during a match against South Korea, according to media reports…
…However, according to Iranian news reports four players — Ali Karimi, 31, Mehdi Mahdavikia, 32, Hosein Ka’abi, 24 and Vahid Hashemian, 32 — have been “retired” from the sport following the gesture…
The pro-government newspaper, Iran, reported the players had received the equivalent of a life ban….
June 24, 2009 at 7:39 am
“Or it may be that the conditions to sell you the bond are such that there is some specific and particular way for someone to make a few million bucks from the bond.”
Somehow this is the explanation that makes more sense to me…
June 24, 2009 at 6:51 am
Long Live 21st Century Boliviarian Democratic-Socialism! What hyprocrites these Bolivarians who loudly reject captilism while exercising it behind the peoples back and at the people’s expense. I pitty the PSF fools.
June 24, 2009 at 6:03 am
If you’ve got USD$ 100,000 and you haven’t yet figured out how to escape Venezuela, then I heartedly suggest that you focus on your own well-being and not that of your investments.
You can ALWAYS make more money. (If you are living in a free country.)
I know, Miguel, and I agree: your documemtation of the insanity of the Robolucion is valuable. However, as we enter year 11, it seems that too many people still don’t understand, Chavez is playing for keeps.
Like so many Cubans who died waiting for Castro to exit the stage, I’m afraid that Chavez will likewise outlast most Venezuelans. And like Castro, destroy the country in the process.
June 24, 2009 at 4:09 am
Hi,
Despite of being a scientist, these topics are quite obscure to me, but Ive been told that the only way to get money out of Vzla is through buying these or any other bonds in $ sold by the Vzlan State and then trying to sell them in international markets.
I’ll be acquiring some capital in Bs as I’ll be selling a property in Vzla by the end of this year. My questions: (1) Is it possible to still buy these bonds by the end of the year or I’ll be forced to wait until the State announce another sell out? (2) Is it that easy to sell them afterwards in the international market w/o loosing money? (I mean, if the country’s risk increase then the bonds value will decrease, won’t it?. (3) What other possiblity exist to exchange Bs into $/euros if none of such bonds are available?
I really appreciate your comments on this, because at this point I’m not sure whether it makes sense to sell a property in Vzla if then the Bs won’t be able to be converted in $ at a fairly good exchange rate ( at the swapt rate a small capital in Bs turns just peanuts in foreign currency).
thanks
June 23, 2009 at 11:23 pm
Well, the 190% is a guess. The Government wants to sell you the bonds such that buying them is a little bit cheaper than going to the swap market. So, they seel it to you at a premium at Bs. 2.15 such that when you sell them in the international markets, it is cheaper. Since today the swap market closed at Bs. 6.4, it would seem reasonable that the would sell it at Bs. 6 to make it attractive. That is why I say you should do the math when they announce it, because you will know better the exact price.
June 23, 2009 at 10:38 pm
“Thus, the Government will sell you the bond at around 190% at Bs. 2.15 per US$. This means that if you order US$ 100,000 (and are lucky enough to get it), you pay Bs. 419,000 (195% x 2.15) for each US$ 100,000, then if you can turn around and sell it for 70,000 dollars, then each dollar you get cost you (419,000/70,000)=Bs. 5.98 for each dollar you got.”
Where did the 190% come from, or perhaps I should ask, why isn’t the bond priced according to the official rate of exchange?