Solid rumor of the day:Venezuela to issue US$ 3 billion of 2022 bond

August 6, 2010

Even here in Utah, everyone knows that next week Venezuela will issue US$ 3 billion of a 2022 bond, which is surprising, as everyone expected it to be a short term (2012?) bond with a lower coupon.

So, you may ask: what for? Why increase the country’s debt?

Well, it is not for development or investment, it is to support the figment of Chavez’ imagination that the exchange rate is different than what it is. Since the Government does not have enough bucks, it will issue US$ 3 billion of a bond to be sold in Bolivars. Importers will buy it, then tur n around and sell it for dollars.

It may work like this (all speculation, no details yet):

They will have the bond have a coupon of 10.5% (nice and juicy!), sell it at 100% in exchange for Bs. I.e. You pay for each buck bs. 5.3, since the “official rate” for bonds is Bs. 4.3, then if you buy $1,000 you pay Bs. 4.3 for each buck. But later, the bond has to trade at around 14% yield or around 80% (4.3/5.3=81%). thus you pay around Bs. 4,300 per 1,000 bucks of face value, but this you turn around and sell at 80% of face value, so you only get about 800 bucks for your 4,300 or around Bs. 5,3 per $.

The surprising thing is why 2022, the coupon is vety high, 10.5% at least, but go figure. Essentially Chavez is mortgaging the future, somone in 2022 will have to come up with the 3 billion dollars, which all they do is give. Bs. to the Government todat. No investment in the future, just patch up the distortions for a few months.

The bonds will be attractive, a sovereign issue with a 10.5% coupon, but in my mind, this will bost the short term (2011, 2014, 2015…) Pdvsa bonds, as everyone was expecting a short term issue which would increase the probability of default in the short term.

Just a simple view of what everyone expects, if you have Bs., buy cheap dollars if the conditions are anywhere near close where think they will be.

Just they view from Mormon country and no inside info.

36 Responses to “Solid rumor of the day:Venezuela to issue US$ 3 billion of 2022 bond”

  1. Kevin Says:


    Don’t you mean 12.75%?

    Miguel: Of course, sorry, it’s corrected.

  2. The bond was annpunced, the coupon will be 12.75% maturity 2022

    Click to access Convocatoria-Bono2022-09-08-2010.pdf

  3. Kevin Says:

    The pure Chinese approach to economic development is the diametric opposite to the pure Latin American approach as epitomized by Hugo.

    The Latin American approach is to decide that somehow the system (terms of trade) has been rigged against poor countries. They are forced to give away their raw materials for very little final goods. Good policy, in Latin American eyes (Prebish and Peron), is to rig the system back so that they can obtain more final goods for their raw materials. Little thought is given to actually making goods. In fact, if you produce less, you hope that the price of your goods will go up and you can actually buy more final goods (the theory behind OPEC). Your gain is your trading partner’s (the Yanquis) loss, since the Yanquis will have to make and sacrifice more final goods to get raw materials (the terms of trade move in favor of Latin America).

    The Chinese approach is the diametric opposite. “We are no longer a rich country because others produce more than we do. We have lots of labor, so we must now make more than anyone else.” So the Chinese just make stuff. Anything they can and then try to figure out if anyone wants it. And if anyone wants anything the Chinese are happy to make it. If other people are afraid of the CO2 emissions or worried about coal pollution, the Chinese go ahead and buy the coal and make aluminum. They don’t care that it only makes sense to make aluminum where you have cheap surplus power, they make stuff. Anything they can. They work hard. They study hard. And they just make shit. And if they can’t find a market, they just lend the money so some country that can’t afford it and can’t borrow anywhere else can buy from them. And they export all this stuff to buy the raw materials so they can make more shit.

    So who is the perfect trading partner for the Chinese? Venezuela! The Chinese just want to make stuff, more than anyone who can afford it wants to buy. The Bolivarians just want to buy more than they can afford and promise to pay back loans with eventual exports of raw material (oil).

    The problem that the Chinese will inevitably have is that those who want to borrow to buy things that they can’t afford will eventually not want to reverse the process and repay the loans. Then the Chinese will get screwed just like all the Western bankers did in the previous “debt crises.” That’s why the Chinese really prefer to buy U.S. Treasuries, but that causes a whole separate set of problems.

    In the end, China will get stiffed, either by Hugo or his successors. And the West will make sure that China gets a lousy Paris Club deal.

  4. JOOG Says:


    Wasn’t the Chinese eye in the sky satilite, a $30 billion deal, to also be paid in oil over I don’t know how many years?

    By the way, that eye in the sky is not your big brother watching, it’s someone much worse.

  5. moctavio Says:

    He can sell out the country like that, but it will not be easy for a very simple reason: infrastructure. All the oil in the Faja needs lots of infrastructure from power to roads, to housing. TheGovernment has to provide that. Remember the Chinese did not bid in the last round of the Faja because they did not want to provide financing, they are not stupid. Under current financial conditions, the Chinese are better iff buying Canadian sands companies, colombian oil companies ( run by Venezuelans) or going to Angola. They will do all three.

  6. Kepler Says:

    Miguel, sure it is disaster, but there are more things to sell than just oil produced now through PDVSA in cooperation with others. What if in two years’ time Chávez says the Chinese can come and occupy new fields and exploit that all for themselves as long as they give him X billion? Or not just oil, but iron or anything else?
    I am sure there are many other ways to mortgage more and more of Venezuela for several years…time enough for more repression, etc.
    I want to see what could be the worst case scenario because it is better to be prepared for it

  7. moctavio Says:

    No, there is no plenty of oil to mortgage. Production is 2.4 million, we use 800 thousand barrels a day, China gets 320,000 barrels a day in payments when you include this, Cuba gets 90,000 a day for free, Petrocaribe gets 129,000 only half of which gets paid. Add it up and Venezuela gets paid about a million barrels a day, we can not live on that, there is little room formNeuver. Btw i think I am forgetting something in these numbers.

  8. Lemmy Caution Says:

    MO: Yes, except that I expect lots of people will buy the $ to take money away, those bucks will never come back

    We may call that state sponsored capital flight again?

  9. Robert Says:

    I thought the 20 billion bucks was about half oil and half projects and therefore the oil part would be paid back in about two years at current rates.

    And then coming into a presidential election in 2012 will be another 20 or 40 billion dollar loan? There’s plenty more oil to mortgage! And I guarantee China is probably building the tankers right now to carry it. It’s too long a topic but the Chinese have perfected keeping their fingers in the economic food chain beyond imagination. This is one of the elements of loaning money to Venezuela for projects. Don’t be surprised to see Chinese workers in your country building projects with Chinese materials for this money.

  10. moctavio Says:

    Kelper the 20 billion has 200,000 barrels atached to it, that means cash flow frim oil will go down by that much. Thus the Chinese cando this two or three more times, by which Venezuela will have almost no cash fkow from oil.

    Sounds like a recipe for disaster to me.

  11. moctavio Says:

    Btw, most brokers in US showing the 2010 bond as paid.

  12. moctavio Says:

    Yes, except that I expect lots of people will buy the $ to take money away, those bucks will never come back

  13. Kevin Says:

    So the $3 billion bond issuance will allow importers to bring in $2.4 billion in goods (CIF) in exchange for 16 billion Bs?

  14. moctavio Says:


    Step 1: bonds are sold at the official rate of Bs. 4.3 per $

    Step 2: I assume a 10.5 % coupon, so that the yield is 14% near theo yield of the 2023 bond

    Step 3: with 1 and 2 the bond will trade around 81% so that the 10.5% becomes 14% , that is in US$ i.e. You buy $1,000 face value, you can sell it for about 810 dollars.

    You pay bs. 4,300 fir your $1,000 bond

    You turn around and sell it abroad for 810, each dollar cost 4,300/810, around bs. 5.3 per $ today or the day you get it

  15. Kevin Says:

    However, I’m still confused by the $-value of these bonds. If you are going to buy these bonds to get the means to import, how many USD will they fetch today?

    If my math is correct, $1000 today, compounding at 10.5% is worth $3,314 in 2012. If you discount that at 3%, a little more than the U.S. 10-year rate, you would value the bond today at $2,324.

    But if they are expected pay of in Bs at some submarket exchange rate or don’t pay off at all, they are worth a lot less in dollars today. How much will they fetch in hard currency today. If they who $3 billion of bonds is used for imports, how many dollars will this bond issuance buy?

  16. Kevin Says:

    Roger, You are very right.

    The essence of politics as it is practiced all over the world is to “launder your BS into USD.” Or as they say: “Money talks and bullshit walks.”

  17. Roger Says:

    Think of it as creative campaign financing and you even get to launder your Bs. into USD!

  18. moctavio Says:

    Told you, Mormons have inside info

  19. Miguel Octavio Says:

    Jeje cant rdit comments on phone

  20. Roberto N Says:

    MO, you need to remember not to type with your mouth full!

    Didn’t your Mom teach you any manners? 🙂

  21. Miguel Octavio Says:

    It will be interrsting, with no patallel market there is no way to make a quick profit

  22. A_Antonio Says:

    In another subject,

    I have to congratulate near former president Uribe because his demand to Chavez and Venezuela (with little self shame for me, as Venezuelan) in the International Penal Court.

    As says in international news, Uribe’s electoral promise was combating the FARC and ELN, and get elected because it, in the beginning of his presidential period were 19.000 terrorist, at the end there are only 7.000, from which Colombia calculate 1.500 are in Venezuela (their relief zone).

    To finally win the war against terrorist, Colombia needs that Venezuela negate help to FARC and ELN groups, that’s why they assume the role of good police (Santos) and bad police (Uribe) to Venezuela, to try to break the protection to FARC and ELN.

    Chavez only came with the idea to give FARC and NFL belligerent status to try to sits them with Colombian government.

    Never mind, that FARC and NFL, use narco traffics, extortion and kidnapping to financing their war, for me, they forget their political motives a long time ago. I would like to see any country give belligerent political status to groups or mafias dedicated to narco, extortion and kidnapping as principal means of their profits. Yeah, right, Chavez will get that.

  23. A_Antonio Says:

    I do not count with these Bonds.

    It will be only to sell to importers and Chaviztas.

  24. moctavio Says:

    Gordo: you pay with Bs. At 5.3 but the bond is denominated in US$ it is a great deal, you turn around and sell it abroad, let someone else get the interest.

  25. Gordo Says:

    Just thinking out loud, if the black market rate is really 29.21%, then you could buy a really nice house on the beach on Margarita for $50,000. But, if you had to explain where you got the money…. you might end up in jail.

  26. Gordo Says:

    I’m confused. If the bond pays a nominal rate of 14% (or whatever) in Bolivars, and the inflation rate is 25% to 35%, isn’t that going to be a negative real rate of return? Even the banks are paying 15% on saving deposits.

    Now, if you could convert dollars to bolivars on the black market rate which was reported this morning as 29.21. then lend it out at the current Venezuelan credit card interest rate which was increased last week to 33%, then it would be a good deal if you didn’t go to jail.

  27. Kepler Says:

    Well, Miguel, I think Chávez will be able to negotiate for quite some time.
    I just read an article in The Economist about the Chinese in Lesotho.
    If they can bet like that on Lesotho, they will give Chávez a lot, a lot for as long as it takes. Mind: the military are behind Chávez.
    Venezuela has enough resources for the Chinese and others to support the regime for years and years and years.
    Siempre ha sido así, pero ahora es peor.

  28. moctavio Says:

    The 2010 should be paid onMonday, the Treasury said it made payment.

    If only a 2022 were to be issued this is bad for the long maturity bonds, good for the shorts, people tgought it would be 3 billion of a 2012, loading up the short term

  29. moctavio Says:

    Fabio: no typo, that is why it has to yield around 14% to match near tge 2023 for example. it will be sold through banks.

    Kepler, as % of GDP Venezuela’s debt has never. Een thus high, the problem is the multiple exchanga rates, which one do youuse. But yes, Chavez has mortgaged the country, but I amsure hisplan is not to pay eventually.

  30. Alex Dalmady Says:

    2010 5.375% bond $1500 mm matures today (Saturday). I’m guessing they will pay Monday (or did they pay on Friday?).

    Not that they will raise $ with this issue, but it could take a little pressure off CADIVI.

    In any case, since most buyers will flip immediately, this new bond should dampen Veni bond prices, which have been in a sort of mini-rally lately.

  31. Fabio Bertozzi Says:

    Miguel, where to buy the bonds in case the rumor becomes true?. I guess this will be sold through banks. Maybe the 2022 is a typo too 🙂

  32. Kepler Says:

    He has been betting for quite some time.
    For instance: the Chinese deal has mortgaged hundreds of thousands of oil for years and years to come.

    Miguel, how are all those deals with the Japanese, the Brazilians, etc, expressed in our foreign debt? Chavistas will claim Venezuela’s debt was higher before. Do we have a graph of debt through the decades, preferably with some normalization for inflation?

  33. Roger Says:

    Now He’s is betting the farm on the election next month!

  34. moctavio Says:


  35. moctavio Says:

    Forgive the typos, can’t correct the post with the mthid I am using

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