Venezuelan president Hugo Chávez’s announcement in early May that the country may seek to pull out of the multilateral lending agencies, including the International Monetary Fund (IMF), was seen by many as political posturing – not least because Venezuela has paid off all outstanding debts to the World Bank and the IMF.
However, by exiting the multilaterals, existing global sovereign bonds – including three recently issued $7.5bn Petróleos de Venezuela (PDVSA) bonds – could be affected as some contain clauses that leaving the IMF constitutes a default and others are subject to cross-default provisions.
As a result, a Venezuelan multilaterals exit and de facto default could benefit bondholders who would be able to seek accelerated repayment, which in some cases could be attractive, if terms of the debt were honoured.
The burning question is whether Mr Chávez will go through with it, says one New York based investor, who on balance thinks it unlikely (Mr Chavez has just called a government committee to assess the consequences of a withdrawal from the IMF). The cost to the government, which has not defaulted on its obligations to date, would be huge economically and politically. Government and state-owned banks, development funds and the development bank, Banco de Desarrollo Económico y Social de Venezuela, would all be hit because they depend on bond issues for funding.
Multilateral plan at risk
“It sounds great for the galleries, but it would annihilate cherished plans to develop the Banco del Sur [the government’s planned multilateral for the region] and that means they’re likely to back off,” says the investor. The Banco del Sur would probably require Venezuela to be able to tap international debt markets.
For those willing to play the edgy Venezuelan bond markets, PDVSA’s issues look an attractive bet. “What a lot of people are doing is going long on PDVSA and short on the republic as the 80-85 basis points spread from a quasi-sovereign seems too high,” says the investor.
The firm went to market in a ground-breaking $7.5bn deal at the beginning of April. Initially, PDVSA was rumoured to be planning a
$3bn-$4bn deal, only to announce a bigger-than-expected $5bn deal, according to Luisa Palacios, a senior analyst at Barclays Capital in New York. It was then able to increase the size of the deal on the back of investor demand, which came in at about $15bn.
The bonds were placed under Regulation S rules, which do not require them to be registered with the US Securities and Exchange Commission, so US investors could only buy them in mid-May after a 40-day seasoning period. It was more convenient to issue under the Regulation S rules because there are less filing requirements, notes Ms Palacios. Since the 2002-03 strike, PDVSA has made moves to buy back global bonds that have onerous filing requirements and has issued bonds only with lower transparency requirements. This is part of an overall trend to reveal less financial information.
The $7.5bn deal is part of a wider debt strategy and is seen by the government as a vital tool in managing and sterilising Venezuela’s rapid monetary growth, which is stoking inflation – currently the highest in the region, at more than 19% in April. “The amount of liquidity in domestic markets has led the Treasury to step in to help the central bank manage monetary growth,” says Ms Palacios.
Blow to FX market
By offering locals access to dollars, the issue also undermines the thriving parallel foreign exchange market. The typical gap between the official and parallel rate is between 60% and 80%, and every time there is a bond issue that gap narrows temporarily as locals gain access to dollar-paying assets, says Ms Palacios.
Still, political risk in the country also plays through the parallel markets. Recently, the stepped-up nationalisation programme, together with noise from the church and military against the Chávez regime, have exerted downward pressure on the currency in spite of the bond issues, says the New York investor.
By giving locals access to hard-to-come-by dollars, the bond is guaranteed popularity. For the government, too, it offers cheap funding as the bonds are sold at a premium to the official rate although at a more attractive rate than the parallel market. It has little to do with fundamentals. Last year, PDVSA spent about $15bn on social spending, far higher than its outlay on capital expenditures. “PDVSA has become the piggybank of the government,” says the investor.
