Archive for October 20th, 2010

PDVSA: Do I have a bond and a bond exchange for you!!!

October 20, 2010

I know, I know, I have been derelict in my duties here, as the PDVSA bond was announced and not a sound from me. Yes, I was traveling for work reasons and really did not want to take the time to read about the PDVSA exchange and bonds.

But here I go: Last Tuesday, PDVSA said that would would offer an exchange for its Petrobonos 2011 (issued under Venezuelan Law) and that on Monday it would announce the terms for a new bond (under International Law) maturing in 2017 that it would sell to Venezuelans in exchange of local currency (called Bolivars to those who are just arriving here) but all denominated in US dollars.

The Exchange: In July 2009, a.k.a just last year, PDVSA issued a Petrobono 2011 zero coupon bond, i.e. a bond that paid no interest, under Venezuelan Law and in the amount of US$ 3 billion. Venezuelan law, because there was some sovereignty to protect, so we revolutionaries were not about to issue it under some capitalistic and imperialistic rules. After all, as the red tank above says: We all own PDVSA now. Sure!

Anyway, things have not been great for PDVSA since, revenues were up 47%, but earnings dropped 14%, so, it is time to think about how PDVSA will pay for the bond next July. Instead, PDVSA hired some smart bankers that gave the company the standard capitalistic solution: Don’t pay, as long as you are allowed to postpone payment forever, ask Ecuador about this!

Instead, offer bond owners something so juicy that few will refuse your offer. In this case, we will exchange to anyone willing his/hers (how Bolivarian of me, no?) Venezuelan Law Petrobono 2011, for a PDVSA 2013, issued under international law, with a coupon of 8% and at an exchange ratio of 112.5%. That is for each 100% of Petrobono 2011 you have, you get 112.5% of the longer dated PDVSA 2013 which pays interest.

Worth it?

Well, yes and no. Yes, because today the Petrobono 2011 was trading around 94% where it is worth exchanging. No, because when the announcement was made it traded as high as 97% where it was not worth it.


Because you are being paid with a bond that matures in 2013 and investors want such a bond to trade such that if you hold on to 2013 (after the Presidential elections!) you get a yield to maturity of around 12%. Since the coupon is 8%, the new bond has to trade at a discount, i.e. below its face value of 100%, which is compensated partially by the 112.5% they give you of the new bond.

So, as I write this, yes, do the exchange, you will have more money that way if you sell the 13’s after the exchange. Moreover, after the exchange is completed (There are two dates, but I will not bore you with details) I suspect that the 2011 will drop. That may be the best trade there is, buy the 2011 after it drops when the exchange is completed. You will be buying a nine month issue with a yield to maturity around 11-13% and little risk of default.

Nothing like this is available in the world today!

Why international law for the 2013? Well, it is a long story. We all own PDVSA now and we defend sovereignty, but you know, it is cheaper if it is international law, so we will ignore Venezuelan law, the revolution and sovereignty and hold our noses while we issue it this way.

So, concluding: For the exchange, do it, it looks profitable. If you have neither, just monitor the price of the Petrobono 2011 after the exchange ends and if it goes near 91-92% buy it.

The 2017 bond: Separately, PDVSA will issue another bond (also international law, who said sovereignty out there?), a worrisome addiction, which matures in 2017, but will pay one third in 2015, one third in 2016 and the remaining third in 2017.

This dollar bond will pay a coupon of 8.5% and will be sold in exchange for Bolivars to all locals at 100% of its face value: i.e. you pay Bs. 4.3 per US$ of the face value of the new bond. Since this bond has to trade near the other PDVSA 2017, which is around 15%, then it also has to trade at a discount.

Is it worth it?

Well, banks were giving today a repurchase price of 65% for that bond. If you pay for $3,000 Bs. 4.3 per dollar or Bs. 12,900, if you sell at 65% of face value you get US$ 1,950 or Bs. 6.8 per US$ which is quite good, but in any case, if you wait a few days, the bond should  go to 69% or 70%, where your dollars cost you around Bs. 6.57. In either case is quite good, the “implicit rate” of M2 over reserves is now near Bs. 9 by now.

If you want a bond in dollars and just get paid the yield, the issuing of the bond will give you a few possible good chances:

-First, if the Government decides to issuemore than US$ 3 billion, i.e. US$ 4 or 4.5 billion, the offer will be large and too much bond will hit the street and it may become cheap to buy the new 2017 at around 65% (nobody sells at that price in NY today). Good deal.

-Second, people have been selling the PDVSA 2014 (local law), because the 2103 becomes more attractive and because PDVSA issued another US$ 1,5 billion of it without announcing it officially. At the close today this bond was the highest yielding of all Venezuela and PDVSA bonds at near 19% yield to maturity. Once again, you can’t get that anywhere!

-Finally, the whole selling of these bonds is rattling the Venezuela yield curve, changing prices of all bonds by the hour, as investors shift from one to the other and sell one to favor the other. The Venezuela 2022, for example, was today back down to near 85% after hitting 90% last week. At these levels and with a 12.75% coupon it becomes very interesting, as it is above the yield curve of bonds issued by the Republic. If it drops more, it will be extremely interesting.

So, better late than never, this is my take on the exchange and the new bonds. Meanwhile, the international offering consists of a 300 page plus document with lots of info on PDVSA. I may or not revisit that in the future, I need lots of time to look at it which I may not have, but I love the risk part of the document talking about PDVSA not owning the oil fields and the Republic may take them away from it. It gives a new meaning to the conceptual difference between PDVSA versus sovereign risk!