Archive for July 26th, 2011

Another Day, Another Bond Issued, this time by the Republic of Venezuela

July 26, 2011

With oil at almost US$ 100 per barrel, the insatiable revolution announced today the largest bond issue in its history at US$ 4.2 billion (It increases the total debt issued by the Republic by 14%), with a coupon of 11.95%, maturing in 2031, but with amortizations (partial payments of one third) ion 2029 and 2030. The total cost in interest will be over US$ 9.5 billion over the life of the bond.The bond will only be sold locally in exchange for Bolivars, but will only trade in foreign currency like has become the norm in the last few years.

The bond is being used by the Government mostly to supply dollars to importers as a number of items or showing scarcity due to the difficulty of obtaining foreign currency from the exchange control office CADIVI. But part of it will be for capital flight as investors and companies simply buy the bonds to obtain dollars with Bolivars at a cheap rate.

This bond “should” yield around 13% in the international markets, which would require it to trade at around 90%, something which will not happen initially as most buyers sell the bonds immediately flooding the market with bonds and pushing the price down.Today the bond was trading in the informal market at 83%, still high in my mind, where it yields 14.4%. If you can sell it there you would have paid Bs. 4.3 for each US$ and received 83 cents (83%), which implies that each dollar would cost you Bs. 5.18 (4.3/0.83). In the worst case scenario of a price of 76%, the equivalent would be Bs. 5.65, this is very cheap and irrational, but that is what the Government is doing.

Thus, it is a good deal to buy the bonds locally and if the “when and if” drops some, it will also be worth it to buy in foreign currency. The Government is giving away money for the sake of preserving an artificial foreign exchange system. Take it if you can. At the current 83% price other bonds with better current yield to maturity may be more interesting for you, unless you want to play Venezuela medium and longer term in the belief that there will be change. In that case, the 2031 may be a better choice than others.

As someone told me yesterday, this is crazy, the worst part is that many Venezuelans rejoice because they will be able to buy this bond. But we will all pay for it one day.