Archive for February 9th, 2011

Another Puzzling Bond Issue, this time by PDVSA

February 9, 2011

Once again, Venezuela, this time via its oil company PDVSA, gets ready to issue a bond which puzzles markets. As investors were asking for more transparency, more order and fewer surprises in the country’s issuance, PDVSA did exactly the opposite, announcing the sale of a US$ 3 billion issue to be sold via the banking system and with identical characteristics to the Venezuela Global 2022 bond issued by the Republic last August.

There are many puzzles:

-Why make it identical to the existing sovereign bond?

-Why pay a coupon of 12.75% when it would have sold equally well at a lower coupon? In fact, the Global 2022 was issued at a time last August that the yield curve was much higher than it is today.

-Why issue something so unexpected, after sending different signals to investors that are asking for more clarity?

In fact, even though the prospectus says the issue has been approved by the Superintendent of Securities, that office had approved other issues with different characteristics in the last few weeks, but not this one. This also leaves the puzzle as to why after all the publicity surrounding the Public Exchange, this is not being issued there, given that it has become Chavez’ pet project.

PDVSA had been sending very different signals in the last few weeks. In private it was telling investors it would issue the US$ 3.15 billion that it sold to the Central Bank and its pension funds, plus another US$ 3 billion through the Public Exchange. Then, high level insiders at PDVSA were saying, it would issue around US$ 2 billion in the second half pf 2011.

Well, so much of talking to officials to get real and transparent information. Instead, PDVSA issues an identical bond to an existing one, eliminating even the uncertainty of where the new bond (and the old one for that matter) should trade.

You see, The Government issued and identical bond, with a coupon of 12.75% and equal amortizations in 2020, 2021 and 2022, last August. This bond came out last summer at a time that Venezuela was yielding much more than it is now. In fact, when that bond first came out, its price was 78% and it had slowly risen to 88% (88.4% today) as Venezuela’s bond prices improved over the last few months.

Currently, the only dollars people have some access to is the SITME dollars at the Venezuelan Central Bank. Lots of rules, scarcity and all that, but that is the only one you can get at a price of Bs. 5.3 per US$. This is the reference price for everyone.

So, if the PDVSA bond is sold at 100%, with a 12.75% and identical conditions as the Global 2022, if it were to trade at 88%, it would mean you are buying dollars at a price of Bs. 4.88 per US$ (Bs. 4.3/0.88, that is you pay 4.3 for each dollar of bond, but when you turn around and sell the bond you only get 88 cents for each dollar)

But those that get the bonds (rules for this are not known until the bond is assigned) would be willing to sell at 81%, where you are basically buying dollars at the same rate as the SITME rate, the only available rate in the country to mere mortals: Bs. 5.3 per US$.

The result? The Global 2022 will start dropping in price, as investors sell it to buy the lower priced bond with a higher yield to maturity. Because, while there are differences in yields between some Venezuelan and PDVSA bonds, all of these have technical explanations, such as the fact that the 2014, 2015 and 2016 were issued under local law and the PDVSA 2017 has too much supply and more coming from the Venezuelan Central Bank.But as a general rule there is no much difference between the two yields to maturity.

For example,  the PDVSA 2027 and Global 2027 yield roughly the same, thus one would ot expect the PDVSA 2022 and the Global 2022 to have a yield to maturity that is not too different.

But they will be different for a number of reasons. First, there will be more supply of the PDVSA 2022 initially, it will be lower, you are buying dollars for more Bolivars. Second, the Global 2022 will drop but not trade identically to the PDVSA 2022.

For any Venezuelan getting their hands on the PDVSA 2022, it will be cheap. They will be cheap at Bs. 4.88, at Bs. 5.3 and even higher. Since there is scarcity and the parallel market is illegal, people will be happy to buy these bonds and thsu these dollars even at higher prices.

But the Government, somehow and mysteriously, does not want to take advantage of this, selling the dollars higher and getting more Bs. for them.


Is it capitalistic populism?

No idea. Another puzzling issue by Venezuela, this time around by our friends at PDVSA.