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.

Why?

Is it capitalistic populism?

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

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17 Responses to “Another Puzzling Bond Issue, this time by PDVSA”

  1. Steady Biker Says:

    The miss pricing is meant to benefit insiders, not the general public. All that seems illogical to us, college-educated, well-meaning, ethically grounded morons, makes perfect sense to the unscrupulous, grab-it-all-now, embezzlers in charge of the country. This is why, they must retort to timing tricks like announcing at night and allowing only one working day for postures, so they can keep the largest possible section of the pie to themselves and still make this thing look like a “public” auction. You can bet their Bolivars where ready, way ahead of the announcement.

  2. island canuck Says:

    Good chart here to figure out the interest rate based on the price of the bond:
    http://algodeeconomia.blogspot.com/2011/02/relacion-precio-rendimiento-del-bono.html

  3. Miguel Octavio Says:

    Its a crazy deal all sorts of undercurrenrs, it closef at 76.75% today after being all over the place

  4. Roger Says:

    I don’t think that there is that much risk. I doubt the bonds can be negated and their backed by all that black stuff in the ground. While honest and patriotic Venezuelans must see this as a way to protect their wealth by buying them and as a bonus hedging against the inflation that has gripped Venezuela for the last 30 odd years. There are those who see this as a way to get their wealth and themselves out of the country. If they are honest its hard to blame them. Si? Then there are those who have profited from the “process” and are using this and previous offerings as sort of a “Cash and Carry Cleaners”! In a real investment market, Venezuelans would be able to invest by specific projects, providers, services and such. This whole thing brings new meaning to the term “Wildcat” RoboGato come to mind.

  5. Kevin Says:

    sapitosetty Said:

    “..this is more than puzzling. Another Bolivarian lottery.”

    I think that sapitosetty may be on to something.

    If these instruments are being sold above market value, presumably they will be oversubscribed and rationed or maybe awarded by a lottery.

    I’ll bet that I can guess who will award the lottery tickets and who gets to draw the winning numbers. There are billions to be won in this lottery!

  6. carlos Says:

    Some banks are buying back at 70-72%.. this is 6.0 to 6.3 BsF per US$..
    Looks like a nice deal but I will sit tight and hold ‘ em till 75%…
    Agree Miguel?

  7. Tom Leon Says:

    Someone has to pay for the new cable to Cuba, looks like it is the people of Venezuela who can barely call across town. Guess it is more important for the people of Cuba to have internet service than feed the people of Venezuela.

  8. Gonzalo Says:

    it is a screaming BUY if you need dollars. It does not matter if you end up getting 4.3,5.3,8.8,9…whatever as it is the only means to get dollars legally besides begging for sitme to be able to import goods.

  9. moctavio Says:

    If your goal is to get Bs. yes, go ahead. If you like to invest in Venezuela, it has the highest yield. So, go ahead. But there is risk.

  10. jau Says:

    So Miguel, its a screaming BUY!

  11. sapitosetty Says:

    OK, you win, this is more than puzzling. Another Bolivarian lottery.

  12. moctavio Says:

    It very clearly states that it will be sold at 100% in the Prospectus:

    Características del Bono PDVSA 2022:
    Emisor …………………………………. Petróleos de Venezuela, S.A.
    Formato …………………………………….. Eurobono de conformidad con la Regulación S y la Regla 144A
    del Securities Act de los EE.UU.
    Moneda ……………………………………… Dólares
    Tenor ………………………………………… 11 años
    Monto ………………………………………… US$ 3.000.000.000,00
    Precio ……………………………………….. 100% o valor par
    Cupón ……………………………………….. 12.75% fijo y pagadero semestralmente sobre la base de cálculo
    30/360

  13. He dicho Says:

    sapitosetty, i’ve read the prospectus and therre is no mention of premium.

    Strange, because they could’ve asked for more than 100% of its face value.

  14. moctavio Says:

    Setty:

    This one will be sold at 100% according to the Prospectus on PDVSA’s webpage.

  15. Glenn Says:

    This has nothing to do with raising money for the 2012 campaign does it? I know the gov has been scrambling to raise funds to accommodate the upcoming purchase of the election.

  16. sapitosetty Says:

    Pardon me if I’m confused, but I think you’re assuming they will sell them at 100% of face value. PDVSA normally sells at well above face value. The prices are usually still cheap, but not as cheap as what you’re saying.

  17. m_astera Says:

    No matter how it is explained or obfuscated, it amounts to this: Borrowing money at interest, using the resources of Venezuela as collateral.

    Perhaps someone can explain why PDVSA and the government always needs to borrow money?


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