In the next to last post I showed some graphs from Morgan Stanley that seemed to unnerve some people, both pro and against Chavez. As I have tried to explain the job of these guys is to guide their customers in the minefield of Venezuela’s debt, thus their report is an economic opinion of what they are seeing, with no intrinsic political bias. At the end of the day these guys will do well if their recommendations work out.
It has been the standard view in Wall Street that “Venezuela (and PDVSA) have the ability to pay” its dollar denominated debt. However, it seems to me as if the devaluation in January made people realize that Venezuela’s GDP measured at Bs. 2.15 then, was not quite right, and thus the fact that Venezuela’s debt was “reasonable” compared to the country’s GDP is being brought into question now that the Government has decided there are two exchange rates, Bs. 2.6 for the Government and essentials and Bs. 4.3 for the rest. At Bs. 4.3 the Venezuelan economy is simply half of what people thought it was in December and given that the parallel swap rate is now at Bs. 7, then people worry that in US$, the Venezuelan economy is even smaller than they previously thought.
So, let us ask the question from a different angle. Ok, Wall Street is negative, but what are Venezuela’s and PDVSA’s bond prices telling us? What do investors think? A reader attempted to talk about that using sophisticated language in the comments in the next to last post, but I know that such technical language is above the knowledge of the average reader of this blog, so I will try to address it differently.
First of all, let me tell you that since late last year the world of bonds has changed quite a bit. Investors who could not find yields (returns) in safer investments drove prices up (yields down) of almost all bonds in Emerging Markets…
Except Venezuela.
Yeap, even the Ukraine that was yielding (returning) the same as Venezuela in November, rose so much that Venezuela is the lone high yield in the Emerging Market world.
In fact, lets take Argentina. A populist Government, a country that defaulted in 2000, the same country that for a while had to sell debt directly to Chavez every time it needed money. What is Argentina yielding now?
Well, the floating rate Boden maturing in 2012 yields 7.012% today and the fixed (7%) rate 2015 yielded today 10.8%
Summarizing
Argentina 2012 7.02%
Argentina 2015 10.8%
How does this compare to Venezuela?
It depends. If it is Venezuela issued under international law, it is very similar:
Venezuela 2013 11.19%
Venezuela 2014 11.95%
a bit more really, than Argentina, thus investors perceive higher risk.
But if you look at PDVSA the difference is much larger
PDVSA 2011 (zero coupon) 10.35%
PDVSA 2015 14.65%
Now, there is a huge difference (14.5% versus 10.8%!) suggesting investors are not very comfortable with PDVSA’s ability to pay compared to Argentina. I disagree with that perception, but that is besides the point. My opinion is just one opinion, the people who buy the bonds vote with their pockets.
But Argentina should not be like Venezuela, it has no oil, should be a worse risk. But it isn’t.
What about Colombia?
Well, there is no comparison:
Colombia 2012 1.58%
Colombia 2015 4.28%
This is a HUGE difference!
You get 10% more on PDVSA than on Colombia, a country that a few years ago, people were worried about its dollar commitments. But it’s “oil opening” has generated nice oil revenues (Helped in part but Venezuelan oil ex-pats, fired from PDVSA). And Colombia’s economy is booming, even if Hugo does not want to import anything from there.
But Colombia is the rule not the exception. Look at all these issues:
Ukraine 2012 6.3%
Bulgaria 2015 3.9%
South Africa 2012 2.33%
Panama 2012 2.07%
Peru 2012 1.33%
Brazil 2012 1.2%
Now, let me clarify that this is very sloppy. I should show you the coupons (amount to be paid yearly per face value) to make a proper comparison. But why bother? The differences are so large that it does not matter.
The truth is that PDVSA is yielding roughly ten times more (10x) than Brazil until 2015. Investors are saying they have no fear in buying Brazilian bonds at 1.2% until 2012, but they are worried (really worried!) with PDVSA bonds which yield 10.35% if you keep them for the next 16 months. Whatever their reasons, these investors are agreeing with Morgan Stanley, there may be a cash crunch in foreign currency and Chavez may decide to tell investors to bag it.
Will he do that?
I doubt it. There are too many measures he can take, from increasing the price of gasoline, to another devaluation to shrink demand. The problem is that these measures should be taken today, not next year or in 2012. Except we have elections…
But the point is that international investors are voting with their money against Venezuela. They are asking Venezuela to pay through the nose to have them use their money to buy Venezuela and/or PDVSA bonds.
But it should not be that way. Venezuela’s oil and current world’s oil prices should make Venezuelan debt very attractive to foreign investors. Venezuela has comfortable maturities (US$ 1.5 billion in 2010, US$ 4.5 billion in 2012, US$ 1.5 billion in 2013…), Venezuela has CITGO, the German refineries. But
But it also has Chavez-risk, non-transparent numbers and, much like Morgan Stanley, other people have made their calculations and the probability of a bad ending can not be dismissed. If oil prices stay here or drop, watch out! So, why bother.? I will take Ukraine’s 6.3% until 2012, that country may be a basket case, but at least they are trying to fix things and they are talking to the IMF. Thus the difference.
So, you may not like Morgan Stanley’s conclusions, but if you have some savings then put your money where your emotions or intuition is and buy PDVSA’s 2014’s and get a 15% yield to maturity.
Just pray that Morgan Stanley’s guys are wrong, otherwise you may not get paid for quite a while…
(Note and disclosure: This is what the markets are saying. I don’t fully agree with it and currently hold PDVSA 2014 bonds)
The Devil's Excrement 
June 3, 2010 at 11:06 am
At the end of the road Venezuela will have the capacity to pay its sovereing debt, because of its oil reserves. Political turbulence will occur, sooner than later, but investors must understand the capacity of the country to receive their coupons (very attactive by the way) and principal at maturity.
May 1, 2010 at 11:54 pm
Tell mea what it is, I will tell you what I think
May 1, 2010 at 10:17 pm
very good comment about bonds, give me some hint to decide what to do with my investment. than you
April 21, 2010 at 2:42 am
And why should they not be nervous? The following is a letter I have in my book Voice and Noise, 2006 and that I gladly circulate to any creditor I see.
What is the financial world to do with Venezuela?
Sir, In Venezuela, as in most other countries, Congress is supposed to exercise control over the executive branch. For instance, its Constitution establishes that ‘No contract in the municipal, state or national public interest shall be entered into with foreign states or official entities, or with companies not domiciled in Venezuela, or transferred to any of the same, without the approval of the National Assembly.’
Now, even though Venezuela is currently known as a very polarized nation, the fact is that after the elections of December 4, 2005, its Congress includes 167 members who are in favor of and obedient to him who wishes to be called ‘Commander’, and 0 representation for those many who are not in the least in agreement with Chávez´s confused ramblings of his vision of a twenty-first-century socialism. This indeed poses some serious questions about its legitimacy and therefore some serious challenges for those who issue opinions.
For instance, what are legal counselors or credit-rating agencies to do after they might receive a letter from a Venezuelan citizen (or perhaps even read this letter in FT) informing them that sooner or later the debts now contracted by Venezuela might be questioned as ‘odious debt’, as they are not duly approved by a legitimate congress (167-0), nor are they needed, as can be evidenced by the many donations Venezuela, with its own so many very poor, has recently made, among them, to the relatively few somewhat poor of Massachusetts.
Sir, if a company like Nike has to worry about the labor conditions in the factories to which they outsource their production, why should the financial world be allowed to ignore civil representation issues in those countries it helps to finance?
April 20, 2010 at 10:50 am
One last thing, Miguel, could you send me the Morgan Stanley report? My email is jz1861@yahoo.com? Thanks.
April 20, 2010 at 10:50 am
Thanks for the posts on the bonds, Miguel. It’s funny how after Morgan Stanley printed out that report, the price of the bonds went up isn’t it:)
I don’t get the bond prices. When I tell people about investing in them (but not to overdo it because IMO they are still risky), they hear Hugo Chavez and don’t even bother to look at Venezuela’s balance sheet. If you look at Venezuela’s natural resources compared to its debt, I think Ven bonds are practically the world’s only decent yielding long term investment.
I bought some other bonds at the bottom and like everything else, they have gone up here lately. However, I bought some of the most at risk companies in the U.S.: Ford, American airlines, Continental Airlines, Rite Aid, and they all are yielding around 9% now, and some yields at the time of purchase were as high as 33%. My 2027 and 2034 Ven bonds are still around 11 or 12%. I think Ven is less likely to default than American or Ford is, but Mr. Market disagrees with me.
My brother was in the Ukraine in 2008, and housing prices were up like 50% four years in a row, so they have/had a huge housing bubble. That nation is in big trouble. It’s amazing to me that just the name Hugo Chavez means Ven has double the interest payments of countries in far worse shape like Argentina, Greece, Iceland, and the Ukraine. I wouldn’t touch any of those countries with a ten foot pole.
If Hugo Chavez were to have a heart attack and die tomorrow, I think the interest payments would immediately go lower, but I am not so sure they should. I went to the CANTV shareholder meeting in Caracas in 2007 and was disturbed at what I saw and heard.
Almost every shareholder there was bitching about CANTV sending money to the parent company Verizon when it was Verizon/GTE that had built or was building all the towers and phone lines in Venezuela. It was like an open admission to any foreigner there that anyone investing in Venezuela should expect their investment to be stolen. I couldn’t believe that those people were so ignorant of trying to provide investors a win-win scenario. They were actively advocating we win, you lose. I warned people on the Yahoo Krystallex board? (the Canadian mining company trying to open up a gold mine there) that Ven was going to steal their investment and sure enough they did.
I wonder Miguel is the problem Chavez or Venezuelans? The truth is until there are safeguards in place to protect foreign investment, Ven is going to be a mess.
April 8, 2010 at 7:35 pm
That is understood. If you believe your investment will not default, you will sell the CDS to somebody who believes it will in the hopes of getting the money. But 45% of an amount of money over 5 years sounds like the kind of insurance premium you would get sailing through the Gulf of Aden carrying a banner saying “We carry consumer electronics AND have European crew members” (joking).
April 8, 2010 at 12:36 pm
45% of the total expected return? It sounds like a joke.
I was not that familiar with these financial instruments. I know people purchase insurance on their investments. BUT! Most people think that government bonds are “safe” because governments have monopolies and collect money willingly or not, and get their debts refinanced in ways that no private party can get, so their financial misbehavior does produce deteriorating conditions but no immediate consequences.
And I must correct myself, really, I said that Socialism got treated like a con man. Like a pirate! which it probably is.
April 8, 2010 at 8:06 am
a relevant article for sure
http://www.nytimes.com/2010/04/08/opinion/08kristof.html?ref=opinion
April 7, 2010 at 8:26 am
http://news.bbc.co.uk/1/hi/world/americas/8583662.stm
Great story on BBC
April 7, 2010 at 3:37 am
What are the CDS spreads of Bolivia and Ecuador?
Can’t find it in google myself.
April 6, 2010 at 6:27 pm
Let me understand…
You (all) are saying that in buying Venezuelan bonds, the investor must pay 8.7% of the notional amount (value of bonds) in 5 years to insure themselves against default?
State Socialism IS funny. It’s proponents tell everyone that it’s purpose in the world is to stamp out greed and to produce a honest, hard-working society. And it ends up being treated like a confidence scam.
April 6, 2010 at 4:14 pm
For comparison purposes, in February the 5-y spreads of
Canada was about 15
USA and Germany about 35
France around 60
Japan and the UK around 90
April 6, 2010 at 3:06 pm
Miguel –
Have you done a comparison of the value of the Bs. in $ and Euros against the rest of the LATAM currencies since 1999 ? I believe the Bs. is one of the worst performing currencies at the official rate (imagine at the REAL rate)
April 6, 2010 at 12:55 pm
Actually Antonio, you should have asked “Si el Guaire suena…”,
April 6, 2010 at 10:55 am
Like venezuelans says: “If the river sounds….”
April 6, 2010 at 10:15 am
Is it true the El Universal’s new web site that says by CDS Data Vision rating the venezuelan’s loans is now the most expensive to assurance?
I tried to see in the CDS Data Vision but call to register by download the report.
Maybe there is a blogger that can confirm the news and confirm that maybe Morgan Stanley and MO is not in the wrong way.
April 6, 2010 at 10:15 am
Easier to look at 5 year CDS spreads.
Argentina 850
Brazil 118
Chile 89
Colombia 139
Costa Rica 161
Mexico 107
Peru 116
Venezuela 870
Also the Venezuela and Argentina curves are inverted, suggesting near term stress.
April 6, 2010 at 10:09 am
The bond market has its own way of looking at things.
Right now Kazakstan>California and the Governator ain’t happy about being upstaged by Borat!
http://www.ft.com/cms/s/0/f0ae5948-3e4f-11df-a706-00144feabdc0.html
In any case, the market is measuring “willingness to pay”, rather than “ability to pay”. And it (the market) doesn’t trust Chavez.
Glad to see you’re holding on to your Ukraine. LOL.
April 6, 2010 at 6:59 am
No, these are all dollar denominated.
April 6, 2010 at 6:28 am
What I keep asking me myself is… now that money is on the short side.. what will happen with all those international projects financed by chavez… telesur, alba, etc and all those other satellite countries which are heavily financed by Venezuela… such as Bolivia, Ecuador and even Argentina, do they have a plan B? Should we expect social unrest in the region due to the lack of “social peace” being bought by Venezuela’s dollars?
April 6, 2010 at 5:13 am
Aren’t Vzlan bonds paid in Bs?
I think markets are simply pricing a new round of devaluation (2x?) which would eat on your $ principal a lot (leaving you with negative return at maturity)
P.S. love your posts