The Devil's Excrement

If Venezuelan and PDVSA bonds are worth some US$ 60 billion, then today a computer virus made them gain about US$ 1.2 billion, just like that, as the virus was embedded in an email with a headline mourning the death of none other than Hugo Chavez.

The whole thing was bizarre. Venezuela and PDVSA bonds were sort of mixed in the morning and all of a sudden, around noon, I noticed they were up strongly, but there was no news explaining it. Then, a friend calls and tells me New York is full of rumors suggesting that Chavez may have died. I got a dozen calls or cahts on the topic within minutes. Given that he supposedly signed some documents mid-morning, it was hard to believe this could be true.

But the rally kept going. It was only later, that another friend sent me this denial by La Prensa:

You can read it better in the original, but basically it says that this email purportedly showing a page from Panama’s La Prensa was circulating, saying “All of Venezuela in Mourning” because of Chavez’ death. But the whole thing turned out to be a virus, as if you clicked in the video of Chavez, it would download a virus which supposedly takes over your PC.

Well, some people did not even click, they believed the news and it spread all the way to debt markets, where it had a not insignificant effect. Even Panama’s Police felt it had to issue a warning.

Go figure!

Some people speculated the virus came out of the Presidential Palace. Others joked it had to be fake, how could it say “All of Venezuela in Mourning”. But in the end, the underlying truth is that debt markets would have an incredible rally if there wa the possibility of political change in Venezuela. And I understand why. What I don’t understand is how not knowing how orderly or disorderly that transition may be, does not make a difference. Just think, if the news had been right, Venezuela’s President would be Elias Jaua, a lightweight politically. Jaua just happens to be in Russia today, I wonder what his enemies would have done about that if the news had been true.

But the effect is there, an orderly political transition in 2012 will lead to the rally of a lifetime in Venezuelan paper. In fact, the possibility of such a transition should n itself provide a rally for the books.

Unfortunately, I was unable to watch the debate among opposition politicians due to travel. But I have watched clips and read impressions from all sides. My conclusion: It is unlikely that the race will change much between now and February.

The format did not help, asking different questions to each candidate is simply useless in terms of being able to evaluate the field. It is clear that Maria Corina Machado was the best performer, but that type of performance is not what wins debates or changes a race. She started too far back and maybe we should start understanding that the average Venezuelan prefers a gray populist than a sharp visionary. It is, after all our history: Populism sells well. Chavez promised the world, but only delivered on the populism, he forgot about crime, democracy and corruption, but through over promising, remains popular despite his failed decade in power.

Those in Diego Arria’s camp had high hopes that he would once again win the day, but he failed to have the same spark he did the first time around. He had no big announcements and continued to sell his experience as the salient point. Diego’s run is valiant, he is making lots of good points, but my gut feeling all along is that Venezuelans do want new faces, even Chavismo does not seem to get that.

Leopoldo Lopez emphasized fighting crime too much. I did expect him to do much better, he did well, but not enough to move the numbers which is what he needed. Leopoldo should follow his instincts more, he got to where he is on his own, maybe he thought too much about what to say. I still think he should have made more out of the box proposals if he wanted to gain ground.

I think Pablo Perez did well, he was more relaxed than the first time and did not blow it, staying in second place behind Capriles. He needs this, as Venezuelans don’t like to waste their votes and any bad vies surrounding Perez could drop him like a stone. He avoided that.

Finally, there is Henrique Capriles, who won by not shaking the boat, which is what front runners are all about. Ever non-confrontational, Capriles seems to think he is ahead and does not want to offend the former Chavista voters he wants to attract in the Presidential race. So far, HCR has played every step of the way right. He is stiff, non-ideological and non-confrontational, which I would have thought was a sure recipe for disaster, but it seems to work. His CHACACA (Chavistas Con CApriles) joke, obviously prepared became amazingly one of the high points of the night. Maybe it was the realization he may have a sense of humor. I still don’t get him.

Debates are funny events. The format on Sunday did not help, but typically those in the lead try not to screw up and those behind try to catch up. Diego Arria managed in the first debate to create a bigger impression on the electorate. So far, he seems to be unique. Maria Corina did well this time, but there was nothing dramatic in her performance, she was uniformly better. Pablo Perez and Henrique Capriles did not blow it. That is a victory for both. Barring surprises, on primary day voters will all think about those two. Capriles seems ahead, but Perez has more traditional party machineries backing him, he has a chance

Oh yes, there was Pablo Medina ranting every fifth question. That is all he has done in his life, including backing Chavez’ coup in 1992. He has never been electable, but give him credit, he has a point he wants to make and does it.

Chavez’ CELAC shindig is over and it went well for Hugo, attendance was better than expected, while everyone thought Dilma will show up, they weren’t sure about others like Felipe Calderon of Mexico and Piñera of Chile.

But beware of visitors coming to a Summit they don’t believe in. They always do at a price and there were some very nice winners for attending.

The biggest winner was the President of Mexico Felipe Calderon. He got Chavez to pay US$ 1 billion for nationalized Cemex Venezuela to Cemex, Mexico’s premier international company, which has been having financial problems due to the construction crisis all over the place. I noted this in the previous article.

But Calderon had another card up his sleeve, he managed to have Chavez reverse the nationalization of Gruma’s Monaca and turn it into two joint ventures with the Venezuelan Government to produce flour, rice, pasta and oatmeal. Not a bad change of terms for Gruma, as it places a long term bet that things may change in Venezuela.

Cemex probably preferred the money with US$ 15 billion in debt coming due in 2014.

Finally, Chavez signed a deal with Brazil’s Dilma Roussef to buy 20 jets built by Embraer, Brazil’s airplane company. Now, Embraer is a private company, formerly Government owned, trades in New York and while it is true the Brazilian Government owns a symbolic golden share, this is not the type of deal that President’s get involved in, unless…

Venezuela was dealig with Embraer and Dilma just gave the whole thing a little push at the end.

It is indeed a strange revolution. It pays money to its natural enemies in the region to gain favors. It pays high interest rates to capitalists and it gives preference to foreigners over Venezuelans. Just today, it gave a nice “windfall” to holders of Fertinitro bonds, much like it did with PDVSA, CITGO, EDC, Petrozuata and Cerro Negro before. If it fits the goals of the revolution, the money is there to pay for it.

Nothing says a revolution has to have scruples.

Headlines are beautiful things. Just witness yesterday’s “Venezuela to pay Cemex US$ 600 million for its assets in Venezuela”. It really sounds like Venezuela got the good end of the deal, as Cemex had sought US$ 1.2 billion in arbitration and supposedly ended up with only half of that. But did they?

Not really.

First of all, Venezuela had said that Cemex Venezuela was worth only US$ 450 million when it first nationalized it. On the other side, Cemex was asking for US$ 1.2 billion for it. What is not clear is whether Cemex was asking for US$ 1.2 billion for Cemex Venezuela or for its 75.7% stake in it. That alone makes a big difference.

But let’s look at the numbers and the announcements:

1) Venezuela will pay Cemex US$ 600 million, US$ 240 million in cash and US$ 360 million in PDVSA bonds in 4 parts, each one of them of US$ 90 million in the next four years. I am guessing this means that next year Cemex will get a 2013 PDVSA bond, the next a 2014 PDVSA on and so on and so forth.

2) However, Cemex owed Cemex Venezuela US$ 154 million ( I think it is US$ 158 million, but that is a minor difference). You see, after the Venezuelan Government announced that it would nationalize the cement sector, Cemex Venezuela sold its parent Cemex, its subsidiaries in Dominican Republic, Panama and Trinidad for US$ 355 million. Cemex paid US$ 132 million of that amount with dividends that were retained in Cemex Venezuela, US$ 60 million that were assets of Cemex Mexico in Venezuela and thus Cemex owed Cemex Venezuela US$ 158 million. As part of the settlement this debt with Cemex Venezuela is settled. Thus, Cemex Venezuela gets the US$ 600 million in cash and bonds AND gets US$ 154 (or 158 in my numbers) million that it no longer owes, thus Cemex is getting US$ 754 million

3) Cemex did not own 100% of Cemex Venezuela. The public owns 24.3% of it. Thus, the Venezuelan Government that said that Cemex Venezuela was only worth US$ 450 million, is saying that the company is worth US 996 million. Under Venezuelan law, the Government is obligated to buy out these minority shareholders ( I am one) at the same price (in local currency, of course, Venezuelans are second class citizens, more so if they are oligarchic investors). Whether the Government will follow the law or not, it says that the 24.3% not in the hands of Cemex is worth US$ 242 million.

So, Venezuela has to pay about a billion dollars for Cemex Venezuela, closer to the US$ 1.2 billion that Cemex wanted, whether it wanted it for its stake or for the whole thing, than the US$ 450 million the Government was offering.

That this is more of a victory for the Mexicans than for the Venezuelan Government is confirmed by the fact that Mexican President Felipe Calderon said he was coming to Chavez’ CELAC shindig, only hours before it began and right after the agreement with Cemex was signed.

Oh, the pretty revolution!

No sooner had I finished the post last night that I received a few mails with more information on the Fondo Chino. There is a lot of information in this, but I will simply note the highlights and look at the details later, or have others look at the details.

The best source for documents that I received is this one, a little disorganized and duplicate documents, but all but one of the documents that I received today are there.

The main document is this one:

This is the agreement between Bandes, the Chinese Oil Company, PDVSA and the China Development Bank on how the fund would work.  And it is indeed as I described last night.

But what got my interest was that this Government that wants only Venezuelan laws to apply to agreements, easily gives in to the Chinese Government, saying that any arbitration will go to the Singapore International Arbitration Center, as if Venezuela would have a chance there against China. (page 6)

There are many more details. For example, there is a contract for the oil sales, which clearly states what the formula for calculating what the Chinese Oil Company will pay is (page 7):

5. FOB PRICE

THE PRICE OF THE PRODUCT TO BE DELIVERED PURSUANT TO THE CONTRACT HEREOF, SHALL BE DETERMINED BY MEANS OF THE FOLLOWING PRICE FORMULA:

IFO380:  HSFO 380 4% SINGAPORE PLATT´S MID (USD/MT) PLUS K (USD/MT) MINUS FREIGHT (USD/MT).

WHERE K = USD -2.50 PER METRIC TON (MINUS USD TWO DOLLARS AND FIFTY CENTS PER METRIC TON)

and the pricing period is a market price period:

5.1.2 FINAL PRICING PERIOD (FOR FINAL INVOICE): THE PRICING PERIOD SHALL BE BASED ON THE AVERAGE OF THE EFFECTIVE PUBLISHED PRICE QUOTATIONS STARTING CALENDAR DATE FROM THIRTY ONE (31) TO SIXTY (60) AFTER BILL OF LADING DATE (B/L DATE COUNTS AS DAY ZERO)

This makes me feel better, there seems to be a “market” (sort of) mechanism for setting the price, of course, a dollar in oil prices can make someone millions, but this is better than saying that Venezuela was selling oil at US$ 40 or $50 per barrel, as understood by many.

And it made me feel quite good when I read this document, that establishes what the interest rate will be:

La parte ohina propuso que para la porcion en dolares, aplicar
una tasa de interes promedio entre la tasa vigente para la
Fase E del Fondo Conjunto China Venezueia (Libor + 2,35%)
y la tasa vigente para la linea de oreciito a empresas
venezoiar1as{Libor + 4,5%).

An average of Libor +2.35% and Libor + 4.5% is not bad for Venezuela. Ramirez fails to get that this may be the only reason this is good, not those given in his memo to Chavez.

The problem is that the same document says that these guys want to borrow, the not insignificant amount of US$ 116 billion from the Chinese. Not that the Chinese are lending it, they seem to mistrust what Venezuela will invest this money in, but these guys really are thinking BIG!

And this spreadsheet confirms what I said last night, the “excess money” at US$ 80 per barrel in one year is US$ 7.33 billion, Venezuela sends about US$ 11.2 billion in oil (at the estimated price of US$ 80) and “only” about US$ 3.9 billion actually pay for the loan, the rest is available to be returned to PDVSA or the Government (or the CVG for that matter!) to be used at discretion and out of the oversight of Venezuelan institutions.

As I said, Guilty, guilty, guilty! But nothing or little happens. There is a lot of stuff in those links, please look at them and let us know what you find.

It would be funny, if it were not so tragic: Thirteen years after taking power, Hugo Chavez keeps improvising in how he manages the Government. The amazing thing is that he announced that he would merge the Ministry of Basic Industries with the Ministry of Intermediate Industries as if it was the result of a study or an amazing inspiration in order to achieve more efficiencies, when the truth is that he was the one that separated the two functions. No only that, but by a mysterious chain of thought, Chavez merged the Ministry of Intermediate Industries with that of Science and Technology in 2009, a whim that has yet to be explained or understood by anyone.

So now, Chavez reverts the whole thing in the name of efficiency, when his whims of creating and destroying Ministries represents one of the biggest inefficiencies of his rule. Every time Chavez improvises “creating” a new Ministry, millions of Bolivars have to be spent in reorganizing and restructuring the new and the old Ministries and its personnel and assets. Imagine now the Minister of Industries arguing with the Ministry of Science and Technology, which office space, which employees and which funding stays with whom. And if they disagree, they will have to wait until none other than Hugo Chavez decides on each issue. Which could take months or may never happen. Some efficiency!

Take the Ministry of Transport and Communications which Chavez received in 1998. He changed it into the Ministry for Infrastructure, then he divided it into two, then it became the Ministry of Transport And Communications again, then he divided it into two again recently. Just the cost in changing the paper and the envelopes is staggering. To say nothing of implementing the changes under Chavista “Managers”, as oxymoronic a concept as there ever was one.

The remarkable thing is that Hugo Chavez dramatically reduced the number of Ministries when he came to power in 1998, but by now, the number has more than doubled, as he thinks that creating new ones is some form of management technique. Chavez received 21 Ministries from Caldera, reduced it to 13 and if I count correctly and the web pages are up to date, there are now 31 of them. I wonder what it does to efficiency to have 31 people plus Chavez, plus the Procurador sitting at the same table discussing things…

For Science and Technology this is good. It now goes back to having its own Ministry, as it should be. The Minister seemed to be distracted with “Intermediate Industries” whatever that may be. Now he will at least focus on science and technology, which now that I think about it, may not be a good thing. After all, the Minister may start improvising himself and creating “efficiencies” and inventing new concepts in science and technology just like his boss. Maybe we were better off when he was distracted…