Archive for March 31st, 2016

Does A PDVSA Bond Exist If Nobody Pays Attention To It?

March 31, 2016

bono

This week Bloomberg published a story entitled “A mystery bond in Venezuela has traders scratching their heads“, which immediately was picked up by everyone and the news of this supposed “mystery” spread. What is interesting, is that there was really no mystery. Bloomberg itself had published a story on January 27th. 2015, some 15 months ago, entitled “PDVSA sold $3b of 2022 bonds to Venezuela Cen Bank in ’14”, reporting the issuing of the bond, as described in PDVSA’s January 2015 debt report.

This bond was much like many other bonds issued by PDVSA and sold to the Central bank, as well as Government owned banks and later used to be sold at the time in the Sicad market, which was mostly fed with these bonds. It just simply was not used because conditions changed.

So, what happened? Why did people not notice? Why are people surprised?

Simply put, since the Central Bank never sold it, people barely paid attention to it and they simply forgot it existed.

The true story is that people were quite aware at the time of this bond. There is no mystery, no surprise. What happened was that the bond was sold to the Central Bank, which intended to sell it into SICAD. The day the bond was issued, the other PDVSA 2022 bond with a 12.75% coupon had a yield to maturity of 15% and traded at roughly 70%-80%. Thus, the no-mystery bond would need to trade at 60% of its value to have an equivalent yield to maturity. That was the plan, sell the bond at the “official rate” in the SICAD market and the buyer would get about 60% the face value of the bond when it sold it.

Except that bond prices collapsed, as oil melted down in the ensuing weeks, as shown in the following plot for the PDVSA 2022 with the high coupon:

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In the weeks following the issuing of the bond the PDVSA 2022 12.75% bond dropped from almost 80% of its value to below 40% of its value in the blink of an eye, its yield soaring to 30%. This meant that the Central Bank would have to sell the new bond in the SICAD system at a price of only 32-33%, almost half of what it had planned. Thus, the Central Bank shelved the bond, did not use it and people just forgot or were sloppy and did not read PDVSA’s debt report. But it was always there, Bloomberg had it in its database since the end of January and if you kept a tally of PDVSA’s debt, you knew that PDVSA’s debt rose in 2014 by US$ 3.2 billion, despite paying US$ 3 billion for the PDVSA 2014 in October of that year. This only happened precisely because the non-mystery bond was issued.

And much like the paradox of whether a tree falls in the forest, does it really fall if nobody is there to watch it fall, you have to wonder if then a bond exists if nobody pays attention to it.

Any trader surprised by the appearance of this bond was simply sloppy in following PDVSA and what the Government was doing at the time and why. There is no mystery, simply put, in 2014 the Central Bank was not willing to sell the bond at 30% of its value as bond and oil prices dropped, but with the current dramatic scarcity of US dollars in the country, it is now supposedly willing to do so.

As simple as that.

Note added: A good friend tells me that the whole thing started because all of a sudden Bloomberg gave the bond a price on March 22nd., however I haven’t been able to find anyone that has traded it….

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