Archive for October 6th, 2009

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…