## Archive for October 18th, 2009

### Here we go again: We now get a trio of PDVSA bonds

October 18, 2009

In Spanish here

No sooner had we settled the Venezuela 2019 and 2024 bonds, which investors received last Tuesday, that PDVSA announced last Friday that it would issue three bonds in a combo maturing in 2014, 2015 and 2016 with coupons of 4.9%, 5% and 5.125% respectively. Each buyer will buy a combo composed of \$1,300 of the 2014, \$1,300 of the 2015 and \$40o of the 2016. They will be sold to investors at a price of 138% in Bolivars but at Bs. 2.15.

Thus, while the whole of emerging markets countries issued around US\$ 20 billion in September and not one issue exceeded US\$ 2 billion, Venezuela began October by issuing US\$ 5 billion and now is ready to issue another \$3 billion. Of course, PDVSA could decide to issue more if it wants. Except…

that it would have to change the terms if it wants the issue to be succesful, because as it stands, buying dollars via the PDVSA bonds is more expensive than going to the parallel swap market.

Let me remind you how this works (Version for Dummies here) :

1) You buy \$3,000 in bonds denominated in \$ for Bs. In this case you pay \$3000 x Bs. 2.15 x 1.38= Bs. 8,901 for the combo

2) The bonds are not worth \$3,000 in the international markets, they sell at a discount, i.e. less than 100%. Let’s assume the combo (more on this later) sells at an average of 55% of its face value, then you get \$1,650 for your bonds if you sell them right  away.

3) Since you paid Bs. 8.901, then each \$ cost you Bs. 5.39  (8,901/1,650) which is according to the swap market value, which I am not allowed to print, more expensive than doing a permuta swap according to this page.

So, whether it is a good deal or not boils down to what is the value of the bonds in the international markets. Since the bonds don’t exist yet, we have to use other existing bonds as a guide or a guesstimate or what their price should be.

PDVSA has four bonds out there: the 2011 zero coupon Petrobono (zero coupon means no interest, you get 100% of face value on maturity) a 5.25% coupon bond maturing in 2017, a 5.375% coupon bond maturing in 2027 and a 5.5% coupon bond maturing in 2037.

The new PDVSA bonds are closer in nature to the 2011 Petrobono because in contrast to the 2017, 2027 and 2037 issues, which were issued under New York law, these bonds are all issued by PDVSA under Venezuelan law. What this means is that foreign investors don’t like them as much. For some reason, they don’t trust our Courts as much as those in New York. Wonder why?

Because the new bonds mature after 2011, the first thing we can say is that they should all yield at least the same as the 2011 bond, if not more.

Why?

Well, usually (there are exceptions that I will not go into) the longer maturity of the bond the more investors want to be paid for it. This can be understood simply as saying the longer I have to look into the future, the fuzzier it is, the harder it gets to predict.

In PDVSA’s case, if you are uncomfortable that it will pay you in 2011, imagine if you had to wait three more years! Or five!

Thus, a first approximation would be to say they all yield the same as the Petrobono 2011, which on Friday was yielding 16.8%. This is the most optimistic case. If this were the case, using Excel you can calculate that the 2014 bond would be worth 60.8%, the 2015 56.4% and the 2016 53%. Which means that you would get for the combo \$1,735.8 or you would be buying each dollar at Bs. 5.14. Does not sound that attractive, right? It gets worse…

Because this is the best case scenario. In reality these bonds should not only yield more, but when they begin trading they will yield even more as the market absorbs them. As an example, the 2019 and 20124 bonds issued two weeks ago, have always yielded at least 1% above similar Venezuela bonds and are still above them.

Additionally, the longer bonds should yield more, even if the difference is small. Using as a guide Venezuela’s bonds, the 2016 yields 0.7% more than the 2014.

Thus, I think you can assume safely:

1) The 2014 will yield at least 1% more than the 2011 because of markets and you have to add 0.35% per year. Thus the 2014 should be at 16.8%+1% (markets)+1.05% (longer maturity 0.35% per year) for a total yield of 18.85%

2) The 2015 should be 0.35% above that or at 19.2%

3) The 2016 should be 0.35% above that or at 19.55%

This gives a value for each dollar of Bs. 5.69 per US\$, 13.8% above the close on Friday.

Definitely not worth it.

Why did they do this? Because PDVSA thinks the bonds should trade higher. They are probably assuming they should trade with Venezuela’s bonds or its own New York issued bonds. But markets say this is not the case.

Thus, unless PDVSA changes the 138% factor to make it more attractive, the issue should fail. People are not dumb.

Unless there is a hidden agenda somewhere and there is always an edge with the robolution when it comes to these bond issues. I haven’t figured out where this one could be. Maybe PDVSA will start buying the Petrobonos like crazy tomorrow and drive down the yield sharply to make the comparison more attractive (Remember I am assuming Friday’s prices in all this, if the Petrobono goes up in price the numbers would improve)

We shall see, I will keep you posted. For now, stay away from this.