The Devil's Excrement

As usual, I underestimated the creativity of the
revolution by about US$ 130 million. Instead, I presented a scenario, which
while still nonsensical, had some redeeming value for the country. Yje reality is that there is no reddeming qualities to this new financial rip-off

Because it turns out, the true and real scenario probably
represents a clear rip off and remarkably, people are mad and many have refused
to participate in it.

Essentially, the deal works like this:

A local broker, not a very well known one that recently
changed hands, is in charge of the operation: To place US$ 650 million in an
Electricidad de Caracas bond, maturing in 2018 and with a coupon (annual
payment in two parts) of 8.5%. The placement is “private” highly unusual for a
Government entity. Recall Electricidad de Caracas is now owned by PDVSA.
Private means that there are no ads in the papers, nothing of the
much-ballyhooed “democratization of capital”. Just friends and family. (Recall EDC disappears as a legal entity in May 2010, so that it makes little sense to issue a bond beyond its demise, moreover the company is buying back its previous bond at an outrageously high price)

The bond was “announced” on March 28^th. even if
nobody was there to hear the trees fall in the forest. The Bloomberg system
created it and the sole dealer of the issue was Dutch bank ABN AMRO, who I
think is owned by Barclays these days.

So, let’s use an example since many people were lost with
my story last night:

You are offered $1,000 of an Electricidad de Caracas bond
maturing in 2018 at a price of 105%, but at the official rate of exchange. This
means you would pay:

1.05*2.15*1,000=2,257.5 new Bolivars for US$ 1000

BUT, and this is a huge BUT, you are not allowed to keep
the bond. They repurchase it from you in exchange for dollars at a price of
62.7% (Reuters below says 66%, I heard only 62.7%)

So in exchange for your 2,257.5 Bs. You get 0.627×1000=
627 dollars, so you purchased each dollar for Bs. 3,600 plus the transaction
tax, below the parallel swap exchange rate. That is YOUR profit, if you were
lucky or unlucky enough to be offered the bonds.

But something is not altogether right. You see, last night
I assumed Fonden was buying back the bonds for its portfolio, but I did not have the details of the
bonds. With a 8.5% coupon and a maturity in 2018, a price of 62.7% gives you a
yield to maturity of the bond, i.e. the effective yield you will have if you
keep it until 2018, of 16.3%, obviously too high for what Venezuelan bonds
yield these days.

How do I know Fonden or somebody else is not keeping them? Easy, brokers in
New York are buying the bonds at 83%. Thus, whomever is buying them “forcedfully”
from you is turning around and selling them at 83%. This makes sense; the yield
to maturity is the bond at 83% is 11.3%, much like the yield of the PDVSA 2017
bond yesterday. That is a true market yield and price.

What this means is that someone is making a lot of money
in the deal.

How much?

Well, you can calculate it in Bs. (They are buying dollars
at Bs. 2.7 per US$). But since their trade is in dollars it is very easy to
calculate: They buy at 62.7% and sell at 83% for a 20.3% difference.

Since the size of the bond is US$ 650 million, the profit
is a cool US$ 131.95 million. (20.3% of 650 million)

No wonder it is “private”, someone really wants to keep
the profits! Who? It is anybody’s guess, but it is a PDVSA owned company, which
issued the bond and chose who, how and what to give to whom. The rest I leave
to your imagination.

But a funny thing happened on the way to the profits…many
banks, brokers have refused to participate. They don’t like the deal, they
don’t like how it is being done and they don’t like that you have to pay a
small broker with no credit rating and that is who you have to pay before you
get your dollars.

Thus, as of last night, someone told me that the issue was
not being successfully placed, despite the possible profits.

The whole thing is just too clumsy and badly done, but
what do you expect?

Just so you don’t think I am the only one mad at this or that knows about it,
Reuters wrote about the EDC issue and clearly they were sufficiently bothered
by the whole thing. (Some of the numbers are different, but they only change
things by a little bit). Here is a translation of the Reuters report:

CARACAS, April 2 (Reuters) – A subsidiary of the Venezuelan
state-owned company La Electricidad de Caracas launched an issue of $ 650
million in debt notes maturing on 2018, operators said on Wednesday, which
questioned the placement scheme, since it is being made by direct award.

    
The bonds of Electricidad de Caracas Finance BV have a fixed coupon rate
of 8.50 percent and a price of 105 percent, said the sources who explained that
investors pay on Thursday, in bolivars, for their orders.

    
This type of operation allows companies and individuals to buy dollars,
in the midst of exchange controls imposed in 2003, but at a rate higher than
the official 2.15 bolivars to the dollar, in a scheme that the government has
used before to drain liquidity and try to mitigate inflationary pressures.

     It
was impossible to confirm the transaction with the company, whose owner is the
state Petroleos de Venezuela (PDVSA) since it was nationalized last year.

    
However, the issue was “announced” on March 28 under the identification
code (ISIN) XS0356521160 but not publicized for the local market.

    
The placement of La Electricidad de Caracas <EDC.CR> was coordinated
by the Dutch bank ABN AMRO and, as operators, was conducted by the local
brokerage Unovalores. However, it was not possible to obtain a statement from
the brokerage company.

    
“There are some notes of La Electricidad de Caracas maturing in 2018
and have a coupon of 8.50 percent (…) The strange thing is that they will
never deliver papers, but are going to buy it back at 66 percent, “said
one trader.

     He
added that the issue guarantees, at this price, an implicit rate for one dollar
of 3.69 bolivars. However, another operator estimated it at nearly 2.8 bolivars
to the dollar, computing a value for an 84 per cent in the secondary market,
the 3 percent commissions and fees.