This week, the Venezuelan Government announced that it would issue a new ten year bond maturing in 2014. The issue will be for US$ 1.5 billion and will be first be offered as an exchange to holders of the so called Front loaded interest reduction bonds (FLRB’s) and the Debt Conversion Bonds (DCB’s) due in 2007.
Now, a country issues bonds when i) it needs money, ii) when it wants to reduce yearly payments or iii) when it wants to extend debt in time. This case is not straight forward to analyze.
The first point i) Is definitely not the case as the outstanding FLRB’s and DCB’s amount to more than US$ 1.5 billion so that the Government certainly does not expect to get any “fresh” money from this issue.
Point ii) requires some thought and explanation. Most bonds have a maturity date and make regular interest payments called coupons. The new bond is like that, it will likely have a coupon of 9% payable in two parts every year for the next ten years. But the DCB’s and FLRB’s are different, they were issued as part of the so called Brady bonds, when the future of Venezuela was uncertain (don’t laugh!) so they would not only pay interest, but also make payments of capital regularly.
Thus, these bonds which mature in 2007, require that the Government in the next two years pay capital as well as interest. The capital payments are large, but the interest payments are small because these bonds have adjustable coupons of the order of only 2%. In contrast, the new Global 2014 bond will have payments of roughly 9%.
Ant that is what is difficult to understand: to avoid making payments of US$ 450 million in capital for the next two years, the Government is going to have to pay 7% more per year in interest or US$ 100 million. This seems to make no sense, because Venezuela currently has ample reserves, so there is no problem with making the capital payments, but you are paying too much in interest in the next three years!
You could argue that the reason is three iii) that the Government wants to extend the debt profile in time, however, this runs against the type transaction made by PDVSA in July.
That transaction had exactly the opposite characteristics of this one, PDVSA spent US$ 2.6 billion to buyback all of its debt at equivalent yields that seemed high for the markets and which reduced international reserves by that amount. In that case, the only possible explanation was that they wanted to remove any possible liability for the Board of Directors of PDVSA since that company still ahs not produced financials for 2003.
In this case, in my opinion, there is only one possible explanation: The Government thinks that things are not going to get better than they are and is issuing ten year debt at conditions that will not return. My evidence for this? Easy, despite record high oil prices, Venezuela’s international reserves have not risen at all in the last three months, suggesting any downturn in oil prices will make a dent in the country’s international reserves and force the Government to pay more interest to issue new debt.