(In Spanish here)
Just before the blog went on the blink for a few days I wrote about
the PDVSA bond issue that was announced first on March 22nd., but
the details of which were not known until Monday the 25th. As I
suggested when the final details were announced, it turned out to be another
gift to those that can afford to buy them, as the implicit exchange rate at
which the bonds were bought turned out to be around Bs. 2900 per US$, giving
“investors”, if we can call them that, a tidy profit, since the parallel
exchange rate closed on Wednesday at a bid price of Bs. 3480. Thus, if you
already sold your bonds in the “when and if” market and sold the dollars, you
made a nifty return of 20% for each dollar you purchased. Initially it looked
that there was going to be some risk, but by increasing the coupon of the
bonds, the risk was removed.
There were a few surprises: First, the allocation was
supposed to be announced last Monday, but when the time came for the
announcement, all people got was a press release, saying that there was such
demand for the bonds (surprise, surprise!) that PDVSA and the Central Bank
needed another day for assigning them. While this was going on, rumors began suggesting that PDVSA
may increase the amount of the bonds to US$ 7.5 billion, which would make it
the largest corporate bond in Latin America’s
history. This made the bonds drop in the informal “when and if” market even if
it seemed unlikely that it would be increased. There were two reasons to think it
unlikely, one, it may be too large for the international market and two, the
prospectus called for a “maximum” of US$ 5 billion when you added the
maximum for each type of bond. But such minutiae don’t stop a revolution, who
would dare sue the Government for lying? After all, the chance of getting a
ruling in your favor would be minimal anyway. And indeed PDVSA appeared to decide to take advantage of the
opportunity and increase the size of the offering to US$ 7.5 billion. Of
course, the Government hailed it as “the confidence of the Venezuelan investor
in its oil industry”, which was pure hogwash and an outright lie. Estimates are
that more than 90% of the bonds in previous issues have been sold by the local
“investors”, as three types of people buy these bonds: i) speculators who buy
them, sell them immediately and sell the dollars in the parallel market for a
quickie profit. ii) Individuals who want to protect their savings and these
bonds offer a chance to buy dollars at a cheap rate and iii) Corporations, mostly
multinationals, who have tons of cash in local currency and find this a good
way to either repatriate, keep their money in hard currency or use it abroad
until when and if, the Foreign Exchange control office CADIVI gives them
foreign currency. Of these, a very small fraction of the individuals may keep
the bonds, but this is rare, Venezuelans are famous for not trusting investing
in Government bonds. In fact, they have an irrational belief that their money
may be safer in a local bank than in a Government bond. But the Government kept the pretense, even having PDVSA run
ads thanking Venezuelan investors for “trusting” their oil company and
investing in it. The disinformation was so huge, that some of the PDVSA ads
even said that for the first time, Venezuelans were becoming partners of PDVSA,
as if owning a bond gave you any right to owenership, even if the company
belongs to us in the end. There was, of course, no real answer to the question of why
PDVSA increased the offering to US$ 7.5 billion. After all, the company never
said what it was raising the money for when it said it would be US$ 5 billion;
it had to give no explanation for increasing the size of the offering. In fact,
the whole documentation was a charade: The prospectus
had unaudited 2006 financial statements, which differed from the previous three
financial statements issued by the company so far this year, including those
handed to the National Assembly. In fact those used for the offering were the
best ones (financially) so far, with the company paying the smallest amount of
taxes of them all, no dividend to the Government (despite the Government saying
it got one) and thus the highest profits. Additionally, the production figures
in the prospectus were those of 2005 not 2006. But even 7.5 billion US$ is not too much new debt for a
company with PDVSA's revenues, which only had some US$ 3 billion in debt at the beginning of the year
and now has US$ 15 billion. And that may be the concern, that in the last three
months PDVSA has increased its debt from US$ 3 billion to US$ 15 billion with
little explanation. Thus, the amount of debt is not a concern, but the rate at
which it is being increased has raised concerns about the financial status of
the company. If we believe the 2006 financials presented with the bonds,
PDVSA spent almost 90% of its EBITDA, it's earnings before interest taxes and
depreciation, which measures a company’s earnings capability, on “social
programs”, but the truth is that PDVSA has become Chavez source of petty cash
for his pet projects, whether social or not. Thus, PDVSA now funds what people
thought the regular budget or the development fund Fonden was funding. Last
year, as an example, PDVSA funded the troubled Government airline CONVIASA to
the tune of US$ 60 million dollars, funded infrastructure projects like the Tuy
railroad for US$ 272 million, the Barquisimeto subway for 250 million,
Argentinean cooperation for US$ 188 million, Uruguay for US$ 149 million and
paid Cuba US$ 1,347 for Barrio Adentro II, which is separate from the daily oil
subsidy given that Nation to pay Barrio Adentro I. Thus, Venezuela now seems to have three budgets with some
transparency in only one, The National Budget, the development Fund Fonden and
now PDVSA which appears to fund anything, even a foundation with the last name
of the Minister of Energy and Oil. Thus, it would seem as if the money could be spent on many
things, but we just don’t know, in line with the lack of transparency the
revolution has accustomed us to. Personally, I think PDVSA may simply be
accumulating cash to fund the acquisition of a majority stake in the heavy
crude partnerships, Cerro Negro, Petrozuata, Sincor and Hamaca. That may
explain the US$ 7.5 billion in bonds, the US$ 3.5 billion in a credit line from
a consortium of Japanese companies and the US$ 1 billion from BNP Paribas, all
of which took place this year. Of course, there are other intentions with these bonds.
First, monetary liquidity is reduced because basically locals buy the bonds
with Bolivars and get US$, thus these Bolivars are taken out of circulation,
which reduces the pressure on the parallel market. The problem is that even
this is not clear from the information given out. Here we can assume that since
PDVSA is a net receiver of dollars, these funds will go back to circulation. If
true, this will have little impact on the parallel rate. On the other hand, assume
they use all of it for buying US$, then they buy US$ from the Central Bank and
international reserves would drop below US$ 25 billion, which is right about
the point where foreign investors begin to get edgy. In fact, last week some Wall St. banks were
telling their customers to watch reserves and switch to PDVSA if it gets
foreign currency with the bonds proceeds. The argument is basically that PDVSA
owns CITGO and you can always sue in the US
if PDVSA does not pay, that would be a more direct way of recovering your money
than if Venezuela
stopped paying. But the size of the issue shows how the Government has
little room for maneuver. If it removes US$ 7.5 billion from monetary liquidity
with this huge issue, liquidity only goes back to where it was on Nov. 10th.
2006, but international reserves go down significantly and they have not
increased since August of last year. Unless oil prices go up significantly,
which may or not happen, this could get you into dangerous territory. At the
same time, by going to such a huge issue, it bars the possibility of going to
the markets anytime in the next three to six moths, since international markets
will have to digest the equivalent of 33% of what was outstanding for Venezuela in
the international markets since the new issue. This limits the range of action
of the Government, which may be forced into only issuing Argentinean bonds or
those from any other Latin American country to reduce liquidity. And this brings us to another issue: the allocation. When I
first heard they were increasing the size of the bond to US$ 7.5 billion, I
thought this meant they were going to give corporations, which are the main
drivers of the parallel market, a large allocation. But this was not the case,
for amounts above US$ 500 thousand, you were given only 20% of the amount
requested and never more than US$ 20 million. Thus, corporate demand for
parallel dollars has not been satisfied which should keep that rate up after
wild gyrations the next two weeks as small investors return their US dollars to
pay for the bond. As I suggested, small investors were assigned much more than
in the previous bonds which may lead to some defaults as they may not be able
to come up with the money to pay next Thursday. But those that can pay came out
really well in another strange capital markets operation by the revolution. Extreemely well, 20% return in one week is a return more in accord with ultra savage capitalism than that of a so called socialist revolution.
And by the way, the bonds are still tax free according to
the Minister of Finance, even if there is no legislation that grants them such a
status.
9:01:48 PM 
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