## Archive for September 29th, 2009

### New Bonds 101 part II: Looking Good!

September 29, 2009

Well, the Government announced today the price range for the auction and it looks like it may be quite a gift to buy the bonds. Here is why:

The Government set the Price range from 135 to 140. That is, if you want to buy \$ 10,000 of the upcoming combo you have to pay:

\$10,000 x Price x 2.15 Bolivars for \$10,000 of the issue

Suppose you go at 140, then it is 10,000 x 1.4 x 2.15 = Bs. 30,100

and you get \$5,000 of the 2019 bond and \$5000 of the 2024 bond.

Now, some people did not understand where I got the 12.5% yield to maturity of the Venezuela curve or why I said that it would yield 14%. Here is the explanation:

Venezuela has issued many bonds over the years. They vary in price. No matter what the coupon is or may be, those bonds that mature from 2020 to 2025 are roughly yielding today 12.5%. This may change in a week (or tomorrow), it was around 14% a month ago.

Thus, in an ideal world, the new bonds would go to that approximate yield: 12.5%. This means that even if you have \$5,000 of each of the 2019 and 2024 bonds, you don’t get \$5,000 of each, but something around 72% for both (Where they yield 12.5%) This means that you paid Bs. 30,100 for about \$7,200 of bonds or Bs. (30,100/7,200)=Bs. 4.18 per US\$.

However, the world is not ideal and simply the fact that these bonds are new, will make them yield more than the curve, as the market can not instantly absorb all those bonds Venezuelans will sell during the first week. Thus, if I think that they will yield 14% (a little pessimistic), then the combined bonds will be worth around 67% (These are approximate examples only). Then, if this was the case, you have (30,100/6,600)=Bs. 4.56 per US\$.

Given that the swap market closed today higher at around Bs. 5.3 per US\$, that is not bad, you would be buying dollars at a nice 14% discount. Nice, you buy on Friday and by Monday, you have made 14%, if you had the Bs. to put in an order (The poor are not allowed into this part of the revolution)

Of course, I am not sure if the bonds will trade at 14%, or 13,5% or 15%, thus, I calculate all of the possibilities and you get this graph:

So, even at a high yield to maturity and a high price, it looks pretty good. Thus, I suggest that you don’t be too greedy, bid at 140, the maximum price allowed and you know exactly how well or how badly you will do. And even if we talk 16% and 140%, you will be ok., because you will be buying dollars at a lower rate than the swap market.

Can something go wrong?

Yes, two things could:

1) The Government could decide to increase the size of the offering to US\$ 4 billion or even higher, it has an authorization from the National Assembly for up to US\$ 5.8 billion. More bonds, more offering that international markets can absorb at once and the yield to maturity could be at the high range of things. Essentially, there is not infinite appetite for Venezuelan bonds, because only a selected group of investors specializes in it, thus the market could get indigestion if the Government offered too much and there were not enough buyers.

2) You may think “I am going to be rich!!!”, order a million dollars, but you are not the only one doing it and you may get only \$100,000 allocated. If you have the Bolivars, no problem. But if you are borrowing them, you may have to borrow a million and only get 200,000 and have to pay interest for the full amount. So, don’t go crazy, put in an order for what you have in Bs. No more, no less.

And yes, it looks good! But don’t get greedy…