We have a bond! (Or two) New Issue 101

September 28, 2009

bonds-300x300

After a little bit of indecision, today the Government announced that it will sell at least US$ 3 billion in two bonds which will mature in 2019 and 2024 and will be sold for local currency, but denominated in US dollars. This is much like the other Bs/US$ issues sold by the Chavez Government since August 2003, which are sold in order to absorb liquidity, as well as satisfying the pent up demand for foreign currency. The maturity dates arise from the fact that Venezuela has no bonds maturing in those two years, thus 10 and 15 years from now, the payment schedule will be smoother and hopefully easier for the country. The 2019 has a coupon of 7.75% and the 2024 has a coupon of 8.25%.

I have already received a few emails asking me if it is a good deal, so I will try to answer it here:

–The bonds will be sold at auction. The Government will announce tomorrow a range of values for which it will accept offers for the bonds. Thus, there is no “price” yet for the bonds, the highest bidders will get them.

–At last the Government got smart. In previous bonds, people would put in for 100,000 dollars and they would get a fraction of that and pay for it. This time around, you can’t do that, you have to put up the full amount with your order. Thus, if you want 100,000 dollars of the bond and your price is 140%, then you have to pay Bs. 301,000 (100,000 x 1.4 x2.15) when you place the order and your bank and/or broker has to be able to prove that you did so. This eliminates “fake” orders and will make the bonds end up in the hands of those that the Bolivars and want to buy dollars to keep them. Should be more efficient and help keep the swap rate down for a while.

–Is it a good deal? Well, it will be at a certain price. Today the swap market was around 5.4, so anything you can get below that is “good”. Venezuelan Bonds with maturities like 2020-2023, “yield” if you keep them till the last day, around 12.5%. Thus these bonds should trade around that value in an ideal world.

Except the world is not ideal. The market for Venezuelan bonds handles maybe US$ 100 million on a good day. So, imagine that in the first two or three days, Venezuelans eager to sell their bonds will go to the market to sell. Too much offer, few bidders, the bonds will drop in price. Thus, the “yield” will be higher than the “ideal” 12.5% that matches bonds trading today.

Let’s assume the yield goes to 14.5%, then, at a price of 148%, you would be buying Bolivars at Bs. 5.01 to the dollar a nice discount over the swap market price. However, at 15.5% yield, at the same price of 148% you would be buying dollars at Bs. 5.33 per dollar, with commissions and the like it would be like buying dollars at the same value that the swap market closed today at. Not worth it.

-What do I think will happen? Well, the problem is that today may be too early to decide. First of all, the swap market could keep dropping between now and the last day to receive orders, which is Friday October 2nd. If the swap rate drops a lot, then it’s tricky.

I personally think that the bonds will likely trade in the international markets near 14-14.5%, which means a price around 144 should be fine. But I reserve the right to change my mind before Friday.

Why?

Because three things could still happen: One, the swap market could drop near or below 5 Bs. per dollar, which would make it too close for comfort at 144%. Two, The Venezuelan yield curve could go up, as investors sell (Bond prices are pushed down) to get ready to buy these higher yielding bonds. And three, and this one we will not know until after your order is in, the Government could decide to issue more than US$ 3 billion, if there are lots of orders.

This will have the effect that there will be more bonds (Lower bond prices) than expected coming to market, which would move the curve up even more (Yields to maturity higher than the 14% I expect).

Thus, On Thursday, I will give a brief update on how I see it then.

(Send questions to devilexcrement@gmail.com or write a comment with your question)

3 Responses to “We have a bond! (Or two) New Issue 101”

  1. island canuck Says:

    Just appeared in El Universal:
    http://www.eluniversal.com/2009/09/29/eco_ava_emision-de-bonos-201_29A2807531.shtml

    Emisión de bonos 2019-2024 tendrá precio de 135 a 140%.

    Al calcular el precio de la emisión en 135% y el costo del dólar en 2,15 Bs F., la inversión mínima se puede estimar a partir de 8707,50 Bs F.


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  3. [...] We have a bond! (Or two) New Issue 101 [...]


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