Possible New PDVSA Dollar Bond Helps Venezuela Bolivar Strengthen in ParallelMarket
Rumors began to float around Caracas financial circles last week that Petroleos de Venezuela SA, the Venezuela state-owned oil company, may announce details of a $2 billion bond sale and issue short-term zero coupon bonds by the middle of May -- allowing it to raise much needed capital to pay off its increasingly delinquent accounts. Though still unconfirmed and unofficial, the news helped Venezuela's beleaguered bolivar strenthen from its lows, closing the week at 6.60-6.70 against the dollar in the unregulated swaps market. Miguel Octavio, Executive Director and head of research at Venezuela's leading investment bank BBO, takes a look at the likelihood of new PDVSA bond issuance and its possible effect on the bolivar-dollar parallel market.
By Miguel Octavio
CARACAS -- The Bolivar strengthened in the parallel market this week amidst rumors of a new bond issue and the naming of a new Central Bank President, Nelson Merentes, who was a Finance Minister from 2001 to 2007, and will surely side with whatever the government’s intentions are regarding the deficit and other aspects.
Nothing has been confirmed and news is still quite vague but what’s certain is that the government is concerned about the non-stop rise of the parallel market and is looking for measures that could draw back the high levels it has reached.
The word out on the street is that PDVSA might be issuing a zero coupon bond in the middle of May. It is believed the size would be between US$ 2 and 2.5 billion and that it would mature in two years. Other news suggests that it will be offered to companies, specifically those that PDVSA has debts with, and not individuals. PDVSA could certainly use the cash flow as it is behind in payments due to their contractors, salaries and other expenses; a debt issue could be the answer to this. So an issue directed toward this group would certainly make sense.
Because of reasons exposed later, another option that seems more likely is that the issue could be private and directed to banks and other financial institutions as a way to finance their debts. The issue would not be in US$ but in the form of notes denominated in US$ and payable in Bolivars, like a TICC.
Usually a bond issue is expected to tackle the swap rate -- lowering it by allowing buyers to pay Bolivars and obtain bonds which could be later sold in foreign markets, in exchange for US$. However, if it were a US$ issue, the size of it will probably not be enough to achieve an important effect, and if it does, it probably wouldn’t last long. On the other hand, if the bond is payable in Bolivars, it would not affect the parallel market.
Even though nothing’s certain yet, just the news and rumors have helped the market draw back some. On Tuesday it got to Bs. 6.70 which is lower than it’s been the last few days. It has stayed there since, with not much volume being done as people seem to be expecting an official announcement about the supposed new issue.
One other important matter that should be taken into account is whether there’ll be enough demand for a US$ issue in the secondary market. The only PDVSA issue that has taken place was the one made in 2007, which was of a considerable amount, US$ 7.5 billion divided in three bonds that mature in 2017, 2027 and 2037. Venezuelan and PDVSA bonds’ prices are a little higher from the levels they were at six months ago, partly because things are slightly looking up in the international markets and things have calmed down a bit, and also because a small bounce was to be expected after such a big drop. The bonds are currently being priced at 45, 39 and 39 respectively, which are low prices. This is important as the final selling price will determine the implicit rate investors would get for the final US$ and for it to be effective it would mean that the bond would have to be sold at a high premium in Bolivars, because it’s so short and has no coupon.
Another negative point is that PDVSA is less preferred by investors who tend to go for sovereign debt, so in order to get investors interested the yield they demand could be even higher than 14%, which is the average Venezuelan bonds offer.
There doesn’t seem to be any real immediate risk of Venezuela defaulting, but many investors in international markets tend to stay away from these bonds, simply because of aversion to emerging markets, which are riskier. In addition, negative news regarding the government, oil and Venezuelan companies doesn’t make the bonds look very attractive for foreign investors.
Also a factor, there is another Venezuelan bond maturing in 2011, in the amount of US$1 billion, that would likely mean a total US dollar debt payment of $3.5 billion on that year -- which is manageable if oil prices bounce back by then, but a strain if they don’t.
For now the parallel market remains in a state of expectancy awaiting further, more concrete information.