What the ExxonMobil Versus PDVSA Decision Means For The Country’s Bonds

January 4, 2012

We now have a decision from the International Chamber of Commerce (ICC) arbitration panel. No matter who won or lost, and I am close to ready to review my conclusion to now call it at least a tie, but I just need more info at this time.

The question is: What does the decision mean for Venezuelan/PDVSA bonds?

Well, I think it is very bullish.

It’s simple:

With the decision, I do not expect another one in 2012. While the ICSID could decide before the Venezuelan Presidential election in the Exxon case, I think it is unlikely, and if it does, it will be so close to that event, as to be essentially immaterial. (There will be a hearing in 1Q12 at ICSID) ICC could rule on ConocoPhillips, which is larger in scope, but given how it ruled in the ExxonMobil case, it would likely be also good news.

Thus, there does not appear to be any possible surprises from arbitration on the way to the election, which was one of the biggest uncertainties on the bonds for 2012. Oil could go down, but it could go up too if Iran gets tricky. Thus, based on internal politics, there will be two, maybe three scenarios:

1) Chavez’s health is fine, he leads the polls, get out of the bonds, it will not be received well by those betting on political change.

2) Chavez’ health is not fine, it deteriorates, bonds soar.

3) The opposition does well in the primaries, leads the polls, bonds soar.

But it is unlikely that there will be surprises in the middle, no decisions to screw up your strategy, to use a fairly technical term. Given 1) you get out by mid year, you may lose a little, not much. Given 2) and 3) collect the coupon and enjoy the ride. No ride, nice coupon.   If there is a ride, it will likely your best investment all year. Just like 2011 if you were in the right Venny bonds. (Mostly PDVSA’s)

It’s Venezuelan bond investment at its simplest: Enjoy the carry trade, bet on the upside!

18 Responses to “What the ExxonMobil Versus PDVSA Decision Means For The Country’s Bonds”

  1. edgarfp Says:

    You don’t think that maybe they will use this bullish to emit more bonds?

  2. moctavio Says:

    They will issue around US$ 12 billion this year and it is likely to come more at the beginning than at the end. It is all about the elections.

  3. REMD Says:

    Where can I buy this bonds in the US?

  4. moctavio Says:

    Large brokers sell them, including Fidelity, Merril, Morgan Stanley, JPM, etc. there are many of them

  5. a guerrero Says:

    The confusion is negatively correlated with the amount and quality of information, says the economic theory of rational expectations. If people reads the fine print of Venezuelan Constitution and LOH (including it last reform) will clearly observe that PDVSA is an empty box, I call it “cascaron fiscal”, it does not have anything, except pipes, old refineries, tranport,no more than that. The main asset – oil in reserve and as commodity in the markets- belongs to the Republic of Veneziuela (read Art 301-304 Venezuelan Constitution), economically speaking to the treasure, we say in spanish, “fisco”, it means thant the rent belogns to the fisco, in other words the rent is for the King!!. So what remains of oil rent for PDVSA is what the fisco oes not take, it is the way the oil rent is distributed betwEen his owner -fisco- and the industry. ExxonMobil lawyers seems that they do know that since the demand at ISCD is against the Republica of Venezuela, so do not get confused, the demand at ICC is against PDVSA. Now we can see the differences and the sourdes of the ovarall confusion”. For one reason many do not like to read the fine print, the important ones, similar when people buy insurances polizas without reading the fine print, so when a sinester occurrs, lot of sorprises emerges.
    What would be the” impact of ICC decision on PDVSA bonds? None, at least in case of overeactions because some investors decisions depend of the news wothout knowng a lot about how the markets works and how the “noises” move around, something which is normal in financial marktes where miopia is a natural phenomenom.
    All smart PDVSA’s bond holders should be aware of these law-economics implications. “Investors” buy venezuelan bonds not because of PDVSA, -something very different when buys BP bonds for instance-. They buy bonds because the oil as asset belongs to the Republic, in some respect they are governed by the same variables as sovereign bonds, Republic of Venezuelan bonds.
    So, the next demand, the one at ISCD which is against the Republoca of Venezuela will not have serious implications on the bonds prices.
    Everbody is already looking at the government finances, lot of people in the markets are more confused about the fiscal stance, the amount of oil produced, prices, the barrils of oil compromised by Venezuelan government with some partners like China, since it impacts the fiscal stance.
    My prediction.is not of default, althpugh a technical default could ocurrs when the PDVSA would be refinanced and trasnferred to its original ownern the “fisco”, I think it will ocurr soon, but particularly if opposition win the elections, since public finances must be rearranged, and put everything in order. We have to reestructure the cost of public debt denominated in dollars, and all of it will start refinancing PDVSA bonds. I am suggesting all candidates that thhis is urgent. The public finances liabilities should be organized, both legally and economically, but considering public sector assets. Lot of kob to do, so there is going to be mix a news in the future.
    AlexGuerreroE.

    • CharlesC Says:

      Mr. Guerrero you sound like a true, fair-minded economist.
      Personally, I guess what I have seen and heard has damaged
      my ability to trust these pieces of paper issued by PDVSA.
      I have been expecting PDVSA to fail for a while and
      I am sure they will hold on until after the election,if they can…
      Either way-they fail.If the opposition wins-then they will have
      a huge mess to try and clean up-and new government will
      have to pour billions into PDVSA.
      If Chavez stays in power, PDVSA may be totally wiped out,
      then reorganized under some strange name”dignified peoples
      petroleum socialist paradise” or something like that-probably
      co-ran by Cubans and Chinese….


      • My worst case scenery is that any “regular” government in the short term must to restructure PDVSA’s debt, the documented one, bonds. For me this is an urgent policy. This imply a technical default, I do not see more than that, except some politically motivated games, Iranian type, all of them from the Chavez camp.
        The only “default” I have in mind is the restructuring of debt, and it will impact financial markets, particularly those who gain a prime trading a “risky” debt, knowing that an oil country is not going to default, among others things, because of the logic of its current account. However, financial markets will agree that putting order in Venezuelan debt is something which brings peace into the market, even though with lower gains.
        The financial cost caused by an irresponsible indebtedness is huge, fiscally speaking; no normal government could live with this. We have to arrange the public finances reduce it costs, and in order to do it, we have to trade assets against debt, no doubt at all!!.
        ag

        • moctavio Says:

          Again, taht is 2013, I am saying that in 2012, PDVSA bonds could go to 100 in a positive scenraio, go to 75 in a negative one. But all before September.

          As Yogi Berra said:

          It’s tough to make predictions, especially about the future

          I am in the business of making predictions about the future, not long term economic predictions.

          • a guerrero Says:

            Let’s clarify from the scratch, techically speaking you are making “bets” nothing to do with prediction. You deal with short term bets, tipically in fixed rent market, which reverts into making gueses about all kind of events, political,Chavez health, demnds aganits pdvsa, an so on and especulate about its impact on bonds prices. I do not find it bad, just the contrary, it is a good stuff. Fixed income markets dealing with goverment bonds, including Pdvsa, which are not investment grade bonds, needs any event to accomplish its bets and gueses.
            In my case what I have tried to explain how we need to reorganize government debt tincluding Pdvsa ones, so we can return or enter in a better market of investment grade. Yes I know that it will reduce the risk premium, but it will make a cheaper goverment. By the way, I was no making predictions, since what I am trying to explain requires a political agreement betweeen parties.
            Age.

  6. moctavio Says:

    These bonds are worth buying up to a certain yield (The current yield of a PDVSA 2022 is 15%), if the opposition looks like its going to win, or Chavez deteriorates, we will get to the point where it is not worth the risk for the return you get, around 12-13% in my book. At that point you sell. What will happen in 2013 is not relevant to a bond trader. If you bought PDVSA 2022 11 months ago, you have made a 25% return on your money. If it looks like the opposition will win, these bonds will rally another 10-20% at least and you will collect about 10% more in interest before then. That is a good trade in my book.

    If it looks like Chavez will win, then the bonds will correct down, maybe 5-10%, they were after all at that level when Chavez was not even sick. You also collect the interest, so at worst you break even. Not bad for the upside.

  7. island canuck Says:

    OT:
    Twitter is blocked from Venezuela.

    Reports in ND confirm.
    I can reach it through a USA proxy but it times out from Venezuela, at least on CANTV ABA.

    Probably just a test for when they need to block it permanently.

  8. Ira Says:

    What happens in the event of a surprise political event–like Hugo naming Raul VP in his trek to make Cuba and VZ one country? Or something else utterly ridiculous.

    Or what happens if Hugo drops dead tomorrow from a heart attack?

    Not just before or after the election, but TOMORROW!?

    • moctavio Says:

      I Hugo drops dead bonds will soar.

      If, big if, Raul is named VP, they could go down. Much? I dont know, does it change much? Raul is looking better than HUGO IMHO

      Markets have risks, you have to look at the risk/reward. With this decision out of the way, the reward goes up a lot.

    • CharlesC Says:

      4-Feb.2012 is fast approaching. This will “steal the air” out of the room.
      Nobody will be talking about opposition candidates…
      Every moment lost now-not discussing the defeat of Chavez is
      wasted time.
      Nuts are falling off the tree- and nobody is harvesting them..

  9. Alex Dalmady Says:

    Sell the news. VENZ and PDVSA have rallied sharply since late September, outperforming junk overall.
    I’d wait for a pullback before getting in.


  10. [...] ExxonMobil Versus PDVSA: Arbitration and Numbers, and What the ExxonMobil Versus PDVSA Decision Means For The Country’s Bonds [...]


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