Another Day, Another Bond Issued, this time by the Republic of Venezuela

July 26, 2011

With oil at almost US$ 100 per barrel, the insatiable revolution announced today the largest bond issue in its history at US$ 4.2 billion (It increases the total debt issued by the Republic by 14%), with a coupon of 11.95%, maturing in 2031, but with amortizations (partial payments of one third) ion 2029 and 2030. The total cost in interest will be over US$ 9.5 billion over the life of the bond.The bond will only be sold locally in exchange for Bolivars, but will only trade in foreign currency like has become the norm in the last few years.

The bond is being used by the Government mostly to supply dollars to importers as a number of items or showing scarcity due to the difficulty of obtaining foreign currency from the exchange control office CADIVI. But part of it will be for capital flight as investors and companies simply buy the bonds to obtain dollars with Bolivars at a cheap rate.

This bond “should” yield around 13% in the international markets, which would require it to trade at around 90%, something which will not happen initially as most buyers sell the bonds immediately flooding the market with bonds and pushing the price down.Today the bond was trading in the informal market at 83%, still high in my mind, where it yields 14.4%. If you can sell it there you would have paid Bs. 4.3 for each US$ and received 83 cents (83%), which implies that each dollar would cost you Bs. 5.18 (4.3/0.83). In the worst case scenario of a price of 76%, the equivalent would be Bs. 5.65, this is very cheap and irrational, but that is what the Government is doing.

Thus, it is a good deal to buy the bonds locally and if the “when and if” drops some, it will also be worth it to buy in foreign currency. The Government is giving away money for the sake of preserving an artificial foreign exchange system. Take it if you can. At the current 83% price other bonds with better current yield to maturity may be more interesting for you, unless you want to play Venezuela medium and longer term in the belief that there will be change. In that case, the 2031 may be a better choice than others.

As someone told me yesterday, this is crazy, the worst part is that many Venezuelans rejoice because they will be able to buy this bond. But we will all pay for it one day.

62 Responses to “Another Day, Another Bond Issued, this time by the Republic of Venezuela”

  1. el vampiro Says:

    Pájaro De Mal Agüero en mi casa, yo no lo quiero, jejejeje…..

  2. Juan Says:

    Miguel, the problem is that most buyers in Bs. will be selling them directly to the bank that is doing the transaction for them. Usually these banks are offering absurd prices compared to the secondary market.

    In the last issue, the Mercantil (for example) was offering 69% when the market rate was bidding 77. They also make it very hard for buyers to transfer the bonds to outside accounts in their own name.

    Siempre es un guiso.

  3. moctavio Says:

    That’s for individuals, companies are more savvy than that and get better prices or transfer bonds. Individuals should do the same.

  4. Roberto N Says:

    So would you buy and hold for a bit, Miguel, or buy and sell ASAP?

  5. Gustavo Says:

    Miguel I have question, how can I Transfer the bonds to outside accounts???

  6. Juan Says:

    Agree Miguel. I was talking about individuals. Just like in SITME, they have a hard time getting the banks to transfer the bonds, which is where Gustavo’s question comes in. I am afraid I don’t have the answer as I’ve lived outside of Venezuela for a long time and haven’t participated in the issues.

  7. Frank Says:

    I hope I can ask a silly question… can a foreigner, potentially also living in Venezuela, participate in these issues? What is the mechanism, is it easy to open a bank account and manage transactions such as these in Venezuela? Thanks for any info…

  8. moctavio Says:

    If you area resident and have a cedula you can. But if you dont have an account yet, you have no chance.

  9. An Interested Observer Says:

    Don’t forget to mention that the government “needs” the money even though they estimated income for the year based on a oil price per barrel of, what, about $40? That’s been the norm for years. So they’re getting many, many billions more than they planned for on paper, and still need an extra $4.2 billion. So you’re getting ripped off (as a country, not an individual purchaser) on money that theoretically shouldn’t be borrowed. Rather they should be paying down the debt with all that “excess” income.

  10. Glenn Says:

    Is this a sign of desperation by Chavez heading towards elections? Surely this money will have disappeared long before the election unless he moves it up to take place while he’s still kicking!


  11. My guess is they have enough money – for the government – that this money is for their own benefit. You know, get while the getting is good.


  12. [...] “giving away money for the sake of preserving an artificial foreign exchange system”, as one blogger put it, it could hardly be a less effective way of controlling inflation and scarcity than one of its [...]

  13. rev2012 Says:

    MO, what do you think about the lesser known “banco coordinador” from Russia? Whats their role here? – isnt that a purely commercial bank?

  14. moctavio Says:

    I’s 50% owned by Fonden, the Venezuelan Development bank, go figure….

    • Kepler Says:

      It is owned 49,99999% by FONDEN. It is, according to Kommesant (business newspape) to facilitate arms deals (payments and so forth)…and they did mention it came from FONDEN.

  15. Artemisa Says:

    My guess DB will help RBV as underwriter and cash a fee for the operation while the Russian bank will take care of the funds :P

  16. rev2012 Says:

    heard they recently – yesterday i think – got their license approved to operate in VZ

  17. Kepler Says:

    Miguel,

    Aquí tienes uno de los textos rusos:

    http://www.rosbalt.ru/business/2011/02/16/819878.html

    Pero hay más información en Kommersant.
    Comenté algo sobre eso y otros detalles en los dos blogs.
    Me pregunto cuántos milicos mobilizarán sus ahorritos robolucionarios por allí o gracias a la promoción de ese banco.
    Todo sea por el desarrollo sostenible de la casta militar y los rojitos de SUVs

  18. John Barnard Says:

    Where is all of this money going? Certainly not into housing, education or medical care by the look of things.

  19. moctavio Says:

    !0 billion a year to Cuba…


  20. Like I wrote Miguel, get while the getting is good.


  21. [...] Bolivars, but will only trade in foreign currency like has become the norm in the last few years. Another Day, Another Bond Issued, this time by the Republic of Venezuela The Devil’s Excrement (blog critico quanto [...]

  22. A_Antonio Says:

    This is out if the subject of the post and your web, but as you are more time in USA and you are economics lecture, let me tell you I am worry about the battle between democrats and republicans about the ceiling of the USA debts and its consequences in the world economy.

    Tea Party looks very primitive ideology driven, go blindly forward, without thinking in their consequences of their acts. Remember me how Chavez drives himself.

    What do you think in this crazy battle and in the outcome of this matter?.

  23. Armando Says:

    (Economia Finanzas, HenkelGarcia Economia Finanzas)

    Érase una vez un país llamado Bonolandia. En él, el dólar tenía varios precios y los comprabas a través de bonos. En uno de los mercados el precio de la moneda B (moneda de Bonolandia) rondaba el 8,5 Bs/$.

    Antes de la última emisión de bonos Pedro vendió 4.553 $, y con eso obtuvo 38.700 Bs. Con esa plata metió órdenes para unos 9.000 $. Pero internacionalmente sólo le dan 79% del valor facial. Pedro espera obtener 7.110 $.

    En resumen transformó 4.553 $ en 7110 $ en cuestión de días.

    Sólo en Bonolandia…

  24. Armando Says:

    I have bought bonds, but I feel so bad… thinking about the country’s consequences… it’s like buying gasoline cheaper than water… like paying almost nothing in taxes … it’s just rich people making more money at expense of the poor.

    • m_astera Says:

      I’m with you, Armando. I refuse to profit from a corrupt government putting the people of Venezuela deeper in debt.

    • Kepler Says:

      But you bought them, that’s the most important thing.

      Seriously, Miguel: I don’t see the logic of criticizing the government for what it is doing – robbing Venezuelans’ future, we agree- if you are taking part in the scheme “poque te dejan y los otros lo van a hace”.

    • Pedrop Says:

      Rich making more money at the expense of the poor is the problem of Venezuela in a nutshell, and has been for decades. I’m sure the creatively minded could substitute the word ‘rich’ with other likely choices.

      For many reasons Immigrants to Venezuela were, and are, only interested in climbing to the top of the pile with their not so bright peasant-stock kids and filling their pockets regardless of method and cost to others. And they did, continue to do so and sod the rest. No shame, no compassion and no integrity.

      Even in the face of political adversity that the country faces today the ‘rich’ continue to fill their pockets knowingly pushing the country further towards the edge. They complain about the political re-balancing but make sure they have their Spanish, Portuguese or Italian passport in their back pockets and their dollar account in Miami. They vote for the opposition but that’s only a token.
      No one seems to be interested in Venezuela, I doubt if they ever have been.
      I think I’lll join the bond circus too.

      • Kepler Says:

        Pedrop,

        I am Venezuelan of Venezuelan great-grandparents, from poor rural background. I have friends and know people from every camp in Venezuela and I tell you: It is the same with all groups: they are all interested in themselves, all. And there are exceptions everywhere as well.

        They all also sing the anthem and use the flag for anything and yet when it comes to real commitment to the national community they shit on it. But it is all, not the immigrants. By the way: everyone is an immigrant

        Of course, those who know better have a bigger responsability, but that applies for the educated Pedro Pérez whose great-greatgrandmother was eating arepas as much as for Roberto Lucca, whose dad was born in Rome.

        • gypsy Says:

          Interesting that you give this opinion while living abroad…

          If you care so much about the country and you are not interested in yourself, why leave?

          • Kepler Says:

            Frankly? For several reasons:
            my girlfriend is European and several of my relatives and friends have been shot at, several wounded, 2 handicapped. I do my calculations.
            One thing is my life and the other people who do not have anything to do with Venekistan.

            If Venezuela did not matter to me I wouldn’t be spending a lot of time
            trying push forward a couple of education programmes in Venezuela.
            I have helped in moving a couple of things in Carabobo and Miranda.
            I don’t have to. I wouldn’t be helping more in Venezuela, but I would be putting my friend in danger and I have seen too much. By the way: I also have survived by miracle from a couple of robberies.

            One thing I know I wouldn’t do is to play with the market in such a fucked-up country. I can understand people who want to secure their savings, but there are plenty who simply want to make a buck and 2 and 3 and 4 and 20 and 1000 over and over and over again. That is not happening since Chávez is in power, that has happened for a long time.
            With the money Venezuelans took abroad in the eighties, I used to read, we could have paid the foreign debt several times.

            And what about you?

    • moctavio Says:

      I dont see a moral dilemma in buying bonds. Venezuela has strict exchange controls. You are not buying bonds to finance the Government, you are buying bonds because it is the only access you have to foreign currency.

      Imagine that the BCV sold dollars cheaply (like it did in 1981-82) directly, would you see a moral dilemma in buying them if you need them or want them?

      • Kepler Says:

        Who will have to pay for the profits after elections? It is “the government”? Is it me? Is it you? Or is it the average carajito in Venezuela who hasn’t finished his crappy school?

        • moctavio Says:

          Which profits? If you buy the bond as a vehicle to buy dollars, at the end you bought dollars. Are they cheap? Yes. Again, if the Central Bank were selling dollars like it did for years under a fixed exchange rate and they were cheap, what is the difference?

          Who buys these bonds? Companies that need raw materials and supplies to keep functioning, individuals to protect their savings, people who want to leave the country, people who have relatives abroad. They all need/want dollars and this is the only possible mechanism to obtain them.

          • Kepler Says:

            OK, the minute I pressed I knew I should have changed that word, profit.
            Interest rate at a given maturing time, I should have said…who is going to pay that?

            Is it just people who want to protect thei hard-earned savings or is it also people who are going one more time using the mechanism to multiply their money? I am sure there will be the old retired professo who finally, fi-nal-ly takes out his money and puts it in some secure place…or the company desperate for dollars to keep up production. I am also sure there are green-eyed left-handed people in the Caracas underground right now.

            • moctavio Says:

              There is no easy way to exchange money, some may be doing that, but today most purchases are to get the most scarce thing in Venezuela: US dollars, after a year of no alternative market, most people need to access the markets, they would buy it at any price, the Government sells them too cheap. If they sold them Bs. 2 higher, the same people would buy them.

            • Andres F Says:

              I agree, anyone would do the same. It is not the people’s fault, if the government is unable to control the exchange rate.

  25. Alejandro Says:

    In case that Venezuela was subject to economic sactions would this russian bank be useful in order to offset the damage and keep trade going?

    is it not the case that this is one of the reasons why the Yuang has to revalue in order to aspire to become a reserve currency?

    In the meantime, as it’s difficult to determine when, is it not true that gold as a currency is limited, and these changes will be happening sooner?

    US politicians are short sighted? aren’t they? not constructive and too reactionary?

    Colombian free trade agreement delayed.

  26. island canuck Says:

    OT but economic.

    New renting law will just about kill any new investment by the private sector & will probably remove great quantities of existing rental properties as they become empty. Basically minimum 3 years contract & no security deposit.

    http://www.eluniversal.com/2011/07/28/contratos-de-alquiler-por-tres-aos-afecta-la-oferta-de-bienes.shtml

    The other law that proposes to control business, their profits & what they can sell their products & sevices for. I predict another great failure.

    http://www.eluniversal.com/2011/07/28/ven-como-instrumento-peligroso-a-la-ley-de-costos.shtml

    An already desperate situation is going to get much worse very quickly.

    • An Interested Observer Says:

      But just think what it will do for people needing housing!

      Seriously, the logical result from this, I believe, is the end of new home construction. Those who refuse to rent under these terms face arbitrary expropriation, so they could be screwed no matter what. But who buys a new home under those circumstances? The construction industry will soon tank.

    • m_astera Says:

      There are already many house and apartment owners who refuse to rent to anyone with children because the gov’t makes it very difficult to evict a family with children.

      This is what happens when you give control of the country to people who have never had to produce anything of value or make a payroll, and you allow anyone to vote. (Yes, I know I’m repeating myself)

      • firepigette Says:

        keep repeating Astera, there are some things people are listening to but don’t hear

      • Kepler Says:

        Michael,

        In Germany they allowed anyone to vote in 1932, 1933 and in 2010.
        The detail is not about allowing or disallowing everybody to vote.
        What do you propose? That we introduce a system like they had at Firepigette’s South, where people had to prove they could read and write? Or do you propose a system like in XIX centuy Europe (and I believe in the States), where only people paying so much taxes could vote?
        That is simply not doable. We have what we have. Try to propose that system and see the chances you ever ever ever ever have of being elected. That is not doable anywhee on Earth now and that is good so;

        • firepigette Says:

          Kepler,

          Firepigette’s South, ain’t what it should be:)

          We should not allow voting until the age of at least 21 :

          Adult brains use the frontal lobe to rationalize or apply brakes to emotional responses. Adolescent brains are just beginning to
          develop that ability.The brain continues to change into the early 20′s with the frontal lobes, responsible for reasoning and problem solving, developing last.

          Criminals, other irresponsibles( those who file no tax returns, owe money to the IRS,or those who have not bothered to secure a recent ID, should be
          barred.

          Anything without limits, creates its opposite.

    • m_astera Says:

      Kepler-

      Here is what we have now: Anyone breathing air over a certain age can vote. In some countries everyone eligible is required to vote, by law. In the USA they have “motor voter” where you can automatically register to vote when you get a driver’s license. The effect is that voting becomes essentially meaningless, simply a popularity contest that can be and is easily manipulated by the media. The vast majority of voters have no real clue about who they are voting for, what the candidate stands for, or the issues that matter. And, I would add, that is exactly how the incumbent corporate and political machine wants the system to be. The undereducated, the poorly informed and the poor combined are almost always a majority. They will vote for whoever promises them something for nothing, or for even shallower reasons, such as the candidate being a famous movie actor.

      My ideas are far more revolutionary and radical than what FP proposes. What I would suggest is that in order to vote for any position or any issue, the prospective voter would have to demonstrate a competent understanding of the issue and/or the office that the candidate would occupy. To vote for president, one would have to show a solid understanding of the role and powers of the office, at least. Same goes for any elected position at any level. And the same for any item such as a bond issue to finance construction or schools, or a popular referendum to enact or change legislation.

      The argument can of course be made that if an issue has the potential to affect you, you should have some say in it, but I say that if it affects you, you should care enough to educate yourself, or, possibly, you should give your voting privilege to those who you trust will take the time to educate themselves on the issues. That latter is what the idea of a republic was based on. Democracy as we have it now is simply mob rule by an ignorant and easily manipulated mob.

      When I used to vote, before I gave it up in disgust, I refused to vote for a candidate I didn’t know about or an office whose function I didn’t understand. My votes were informed and educated or I didn’t check the box. Because the majority of voters didn’t bother to educate themselves about anything, my vote was rendered meaningless.

      As for being able to get elected while promoting such ideas at the present time, of course not. The description of the problem above is exactly why one couldn’t get elected: The present system controls the vote through the media, and they are not going to give any airtime or support to anything that might threaten their sinecure.

      • Kepler Says:

        Michael,
        I agree with you the vast majority of people who vote are clueless; a lot of the others do end up voting with their guts anyway. The problem with what you are proposing – without mentioning the vested interests- is that
        testing people’s knowledge on issues is very complicated, subject to discussions about relevant questions and so on.

    • m_astera Says:

      Kepler-

      The private sector is perfectly capable of testing people for qualifications. Matter of fact, even the government is capable of testing for qualifications, not only for jobs but for things such as licenses. How hard is it to test if someone knows what a section of the law or constitution says? As it is, you have to prove your qualifications to be hired as a government engineer, but no qualifications are needed to be elected (or appointed) as the person who tells the engineers what to work on, nor to vote for who will tell the engineers what to do.

      I think what you are really saying is the the system would be subject to abuse by those who wished to disqualify people, which is no worse than what we have now anyway with an ignorant electorate manipulated by those who have the money or power to control the media.

      What could work is a true republic starting at the local level, with most power retained at the local level. Power needs to be decentralized and made real-time, two things that are suddenly easy to do via the internet. Why are we still using a system that evolved when travel was by horseback and it took months to get to the capital and back, and communication took weeks or months by mail?

  27. IvoSan Says:

    why a 11,95% coupon?
    considering the actual currency drought, the private sector (citizens and companies) would have accepted even lower interest rates.


  28. Because the Government wants to maintain the illusion of the SITME exchange rate of Bs. 5.3 per US$, with that rate, 11.95% you get the right yield to maturity for Venezuela’s curve

  29. your friend Says:

    Miguel please contact me asap

  30. javier Says:

    Greetings, and thank you for your great blog.

    As foreigner investor. and taking consideration on the the risk of default. would you rather invest in:

    A: Venezuelan 2022 Bonds
    B: PDVSA 2022 Bonds
    C: none due to high risk of default

    Thank you

  31. moctavio Says:

    PDVSA 2022, higher YTM, higher current yield, dont fall in love though…

    • javier Says:

      how long do you believe the “love affair” should last for.

      Or any signs that should trigger me to sell.

      Thanks in advance Mr. moctavio

      • moctavio Says:

        Well, at least a year, a year and a half. If it gets to 90-92% I would sell. But, it’s simple, ask again!


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