The Venezuelan Government announced last week that it would issue a new bond with maturity in 2011 and a yield of 3 month-Libor plus 1%. The issue will be US$ 1 billion in size but was initially sold only to local investors in local currency.
This is the third issue with similar characteristics sold by the Government since last August, essentially taking advantage of the exchange controls in place to sell low coupon, dollar-denominated bonds to local investors, which later trade in the international markets at a discount. The Government has also sold investments units which contained a dollar denominated six month Treasury Bill as well as two Bolivar-denominated Vebonos. Besides the favorable conditions for the Government, issuing them also has the added advantage of removing excess liquidity from the local financial system.
Local investors find these issues interesting because they are not only a way to purchase foreign currency below the implicit CANTV exchange rate (currently at Bs. 3080 per US$), but also represents a legal mechanism for corporations to purchase foreign currency.
Previous issues, the 2010 and 2018 bonds, turned out to be quite successful for investors, as not only was the implicit exchange rate cheaper at the time of placement, but in all cases, the bonds enjoyed strong rallies after their initial sale. In this case, the new issue has the added attractiveness of being a floating rate bond, at a time of expectations of higher interest rates.
Orders for the bonds were received until Thursday morning and assignments were made yesterday. Orders could be place in competitive and non-competitive fashion in a modified Dutch auction. the issue was oversubscribed and the bonds to be sold at the non-competitive price of 109%.
Assignment of the bonds was done in layers, with each level getting filled until a layer was found for which demand could not be satisfied. That last layer was then be prorated. The bond has traded all week in the range of 72-74% giving an implied exchange rate of between Bs. 2906 and Bs. 2828, without commission to the final buyer. The Ministry of Finance announced that it had assigned at a price of 109%, 100% to all orders up to US$100,000 and 87.5% to orders between $101,000 and $500,000. Those above $501,000 received nothing. Of all the similar issues this is the one that in our opinion has had the fairest process for assigning the bonds, truly emphasizing small orders. It would have been fairer to give everyone a base amount, rather than nothing to those that ordered above $500,000
With this bond, the Ministry of Finance continues its strategy of taking advantage of the exchange controls and reducing liquidity as well as building a yield curve for the country’s sovereign issues. This is the first time the country has enjoyed such a wide filling of the sovereign yield curve in its history. Technically, there is little one can fault in the strategy designed by the Ministry of Finance with these bonds.
This appears to be the last such issue this year. In fact, Minister of Finance Nóbrega indicated that the Government is considering buying back the country’s Brady bonds, as well as the Global 2018 issues. He suggested that this would imply a pause in new issuing until such a repurchase is completed. This should reduce expectations of a new issue and push the implicit parallel exchange rate higher.