Petrobono or Petrobrainless?

July 1, 2009

For two months the Government was “thinking” about issuing a bond for PDVSA. Last week it finally announced it, but:

1) It was too large an issue

2) It was only aimed at corporations

3) It was not registered abroad

4) It was forbidden to be traded in US$

5) The scheduled seemed to ignore i) Monday was a banking holiday, Friday was a stock market holiday in Wall St.

then

i) First the Government decided to let individuals participate

ii) Then it changed the schedule

iii) Then it allowed it to be traded in US$

iv) Finally, yesterday it said it would register in the international markets.

but…

–It is issued under Venezuelan Law, not under international regulations (PDVSA bonds were issued in 2007 under Reg S), international investors will not be as interested.

–Friday is still a holiday in the US and Thursday is half a holiday for fixed income markets.

–It is still too large at US$3 billion.

Thus, the bond remains a strange animal and will yield more than already existing PDVSA bonds. I will create indigestion in international markets as Venezuelans sell it abroad.

My suggestion:

Ask your broker to give you a price such that:

1) The bond yields more than 22%

2) You are buying dollars at or below Bs. 6 per US$

Better yet, do nothing, but next Monday or Tuesday buy the bond in US$ in the international markets as it gives you a yield (Yield to Maturity) of over 22% per yea for the next two years.

Issuing these bonds should be simple, the people managing it are simply brainless, so we go from Petrobono to Petrobrainless.

That is what the robolutionary PDVSA is all about.

22 Responses to “Petrobono or Petrobrainless?”

  1. GeronL Says:

    22%!!??

    Thats insane

  2. John Doe Says:

    What is this?? This bond is going to be a bad joke. There has been little demand on such a junk-moron-risky bonus. I bet that the president will condecorate the ones who bought them. Very sad that there are always some dickwad the bite the bait, totally careless just for greedy. By the way the DPN has not going down as the gov. said, just few cents, what a shoker!!…
    I wonder what will be the next move; Mercal y Marcalito bonuses

  3. JBaumeister Says:

    “…my understanding is that the old PDVSA bonds were issued in a foreign jurisdiction, I think Luxembourg (or UK?), under Reg S. The new one is Caracas jurisdiction. They are not eligible to be part of the EMBI index like the other older PDVSA bonds, you have to go to Venezuelan Courts if there is a default and there are no cross default implications…”

    Miguel, right on the money.

  4. moctavio Says:

    I am not a lawyer either but my understanding is that the old PDVSA bonds were issued in a foreign jurisdiction, I think Luxembourg (or UK?), under Reg S. The new one is Caracas jurisdiction. They are not eligible to be part of the EMBI index like the other older PDVSA bonds, you have to go to Venezuelan Curts if there is a default and there are no cross default implications (i.e. if Petrobono defaults, it has no implications to the older ones).

  5. Megalops Says:

    WF: Nop and there will not be for an unknown period. BCV will be the first custodian, and it will transfer the custody according to PDVSA’s instructions (to the Euroclear or clearstream account provided by each financial institution). All this will happen when and if the bonds are registered in Luxemburg.

  6. WF Says:

    Bidding period is just hours away from ending and this bond has no ISIN yet?

  7. Megalops Says:

    I am not a lawyer but as far as I know, Rule144/Reg S of the the Securities Act of 1933 means that there is no registration required under any US authority. It defines though how and when US investors can trade those securities.

    From PDVSA’s 17/27/37 Prospectus: Los Bonos 2017, 2027 y 2037 no han sido ni serán registrados bajo la Ley de Mercado de Capitales de los Estados Unidos de América (Securities Act of 1933) y están siendo ofrecidos sólo fuera de los EE.UU. de conformidad con la Regulación S de la antedicha Ley de Mercado de Capitales. La presente emisión se encuentra exceptuada de la Ley de Mercado de Capitales de Venezuela de conformidad con el artículo 1 de dicha ley, en concordancia con los artículos 6, 7 y 76 de la Ley Orgánica de la Administración Financiera del Sector Público (“LOAFSP”).

    With respect to the other “shields” investor might have, cross-default provisions, I don’t know if the PDVSA’s bond issues are included. I would bet the 2011 Bond issue is not. Maybe Miguel or someone else in this forum know about this.

    I would add to Miguel’s recommendations:

    3) Don’t bet your FARM;
    4) Avoid buying on margin;
    5) Remember the winner’s course cos sometimes Winning Means Losing!

    Hope this helps.

  8. WF Says:

    The petrobond hasn’t been registered with Euroclear/Clearstream.
    Bait and switch?

  9. HalfEmpty Says:

    buy the bond in US$ in the international markets as it gives you a yield (Yield to Maturity) of over 22% per yea for the next two years. (On Monday)

    as or if?

    I don’t know enough to tell.

  10. Cecilio A. Alvarez B. Says:

    Enjoy the beach!

    I have been living abbroad for long now. I am affraid I am not fully familiar with the details of the PDVSA issue. Thanks for the info.

    You are not missing much today anyway, the markets are crapping out, commodities down, etc. Venezuela’s CDS remains at 1427 bps up 6.3 bps from yesterday.

    Again, congrats on the blog.

  11. Cecilio A. Alvarez B. Says:

    As for investing in them, I am affraid I am to moralistic. I would never judge those investing in them (capital in the end has no morals (my opinion)) but I would never invest in anything that finances this bunch of thieves or help these thieves friends in Bolivia, Nicaragua, Cuba, etc.

    There are other ways to make money in the financial markets via SRI (Social Responsibility Investments) for example. Maybe people will not make the same amount of money but they will be able to sleep 😉

  12. moctavio Says:

    Cecilio: The whole thing has been a joke. The day they announced it it was such that individuals could not participate through a broker because since Monday was a banking holiday, they could not possibly deposit a check that would be good by the date of the bid, which brokers require. Thanks for the compliment, I try hard, for example, I am on vacation on the beach following this through my cell phone…

  13. moctavio Says:

    I am not recommending holding them (unless oil stays up or goes higher). I just think that with the huge offer the first week, the price will drop sharply and you should be able to buy them yielding 20-25% (if not more). But they should trade more like at 17-18%, so you can pick up some money in three or six months.

  14. EG Says:

    My problem with purchasing and holding these bonds is the reason why they are beig issued in the first place.

    Maybe I’m just too simple. The funds raised through these bonds will not be used to increase productivity, add additional capacity or anything to that effect. They are being issued because PDVSA can’t pay. They can’t pay now, why will they be able to in 2 years?. Seems like too much of a gamble. I don’t know, but I’m certain they will default or renegotiate somehow.

    There is a separate issue around the bonds which I’m sure many are pondering. Pdvsa will collect the $3000 in BsF at some sort of premium, say 1.6. They will immediately purchase US$ through the Central Bank at 2.15 (I’m certain they can do that). That means they will magically convert $3000 to $4800. Then they will turn around again and sell these dollars in the parallel dollar market, multiplying the Bsf 10320 collected into (about) BsF. 28800.

    These guys think they are so clever…. But, once again, they will be able to reign in the dollar swap rate for a couple of months and pay domestic suppliers, keeping everyone happy for a little while. But this impacts reserves and internal liquidity setting ourselves of an even bigger correction down the road. I wonder how much longer?

  15. Cecilio A. Alvarez B. Says:

    moctavio, first, just want to say I really like your blog.

    In Bloomberg it says they will “register” its USD3bln bond offering with either Euroclear or Clearstream (probably both). To consider: Can Euroclear and/or Clearstream deliver onshore (Venezuela)? If no, would be interesting to see how “local” these Bonds are.

    My comment “It would be interesting to see also where the Bonds are cleared. Wonder whether Euroclear or Clearstream would agree to clear and settle securities under Venezuelan law.” is because of the conflict of laws that can take place in case of a default by PDVSA. That the Terms and conditions of the Bond are governed by Venezuelan law does not mean the rest of the ancillary contracts will also be governed by it (Agency, Depository (two options here: a) NGN (New Global Note) means deposit the Global Note directly with an ICSD (International Central Securities Depository); b) a Common depository on behalf of an ICSD), etc. I am just trying to point out what an “arroz con mango” this bond issue would become if it goes south (and I don’t mean to Argentina though after we have financed of them they should just buy it and shut up).

    If the Bond is a truly onshore bond meaning no Euroclear/Clearstream and foreign placement of any kind then yes, you do not need (you always can and should) to make references to Reg. S in the selling restrictions of the Prospectus/Offering Circular in an issue in Venezuela however, if that is not the case, then the issuer has to.

    I just found the “Term Sheet” available via Bloomberg and “da pena”. There are no Terms and Conditions, securities numbers (which at this stage they should have some XS ISIN), nothing. I found it via the Bloomberg identifier EH8906438.
    It’s not listed, rated B+ by Fitch (after the credit crisis not that ratings mean much anyway).

    LA OFERTA
    PETROBONOS 2011:
    Emisor …………………………………. Petróleos de Venezuela, S.A.
    Moneda ……………………………………… Dólares de los EE.UU. (“U.S.$”, “US$” o “Dólares”)
    Monto ………………………………………… Máximo de US$ 3.000.000.000,00
    Cupón ……………………………………….. Sin Cupón
    Precio ……………………………………….. Con prima sobre valor nominal, según subasta
    Vencimiento………………………………… 09 de julio de 2011
    Amortización ………………………………. Única al vencimiento
    Denominaciones …………………………. US$ 2.000,00 mínimo, más incrementos de US$ 1.000,00
    Cotización ………………………………….. Sistema de Custodia Electrónica de Títulos (SICET) del Banco Central de Venezuela (BCV)
    Fecha de Liquidación………………….. 09 de julio de 2009
    Liquidación…………………………………
    Contabilización…………………………….. El precio de compra será pagadero en bolívares a la tasa de cambio oficial de DOS BOLÍVARES CON 15/100 (Bs. 2,15) por US$
    No forma parte de la posición en divisas de las Entidades Financieras

    Again, thanks for this Blog, been reading it for 2 years and is the best one. Keep it up!

  16. Andromeda Says:

    Miguel, you forgot

    v) Then it changed the schedule… again!

    Addendum #3 was posted yesterday in the evening hours.

  17. moctavio Says:

    Euroclear will have no problem with the fact that they are issued under local law, I understood that you can not use Reg S with local bonds. In any case, they are local, wichh limits your rights to use foreign Courts if there is a default.

  18. Cecilio A. Alvarez B. Says:

    Hi Gabriel, don’t disagree with you at all. was just clarifying the statement made.

  19. gabrield Says:

    get involved unless creditors are getting screwed. And even if you get a foreign ruling in your favor, imagine trying to get it enforced in Vene…

  20. gabrield Says:

    Cecilio I follow debt restructurings closely. In the end, it does not matter if a bond is issued under NY or UK law. In a debt restructuring situation, courts generally defer to local authorities and don’t

  21. Rivas Says:

    On a different note, have you seen Miguel the photos of the life of extravagant luxury Chavez’s extended family enjoys (nephews etc)? A cousin of mine sent them to me but for me to share them with you I need an email address. Thanks for your blog. It is the MOST informative blog on Venezuela I have read.

  22. Cecilio A. Alvarez B. Says:

    Just wanted to clarify something.

    When you say: “It is issued under Venezuelan Law, not under international regulations (PDVSA bonds were issued in 2007 under Reg S), international investors will not be as interested.” this is not entirely accurate.
    Reg S is a safe harbor from registration under the US Securities Act by which a placement of securities can take place outside the US and offered to non US-persons without having to register the issue with the SEC. There are thousands of Bonds in the market using different governing laws. Using Venezuelan Law does not prevent the Bonds from being issued under Reg. S however, as you validly say, it will raise little investor interest because among other things, investors prefer UK or US law, UK or NY exclusive jurisdiction and to be fair and honest, no one in his sane mind would trust a Venezuelan court.

    I have not followed the details of the issue. It would be interesting to see also where the Bonds are cleared. Wonder whether Euroclear or Clearstream would agree to clear and settle securities under Venezuelan law. If it’s locally cleared more the reason there will be little international interest.

    My 2 cts.


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