http://www.bbo.com 1 August 2011 bbo WEEKLY REPORT If you would like to make sure that you already offering retail clients a buyback price for the bond, if they were to receive their order. receive this report by e-mail each week, Most local investors don’t view these issues please let us know with a message to as an investment, but rather as a way of acquiring Russ Dallen or Miguel Octavio at scarce foreign exchange currency at low prices. Since [email protected] or call us at: the Government wants to maintain an artificially low exchange rate because of inflation fears, it fixes the Caracas (58) 212 335 1906 coupon such that the fair market value of the bond will be at or near the exchange rate of the Central Bank’s Miami 305 735 8280 SITME system, which has been fixed at Bs. 5.3 for over a year. New York 646 201 5843 Local demand for the issue should be strong, as the country has strict foreign exchange controls and London (44) 207 993 4557 individuals and companies have had little access to foreign currency since the PDVSA 2022 issue in February of this year. Approved importers can have Venezuela announces new 2031 bond access to import dollars at Bs. 4.3 per US dollar, while roughly US$30 million is sold in limited quantities per As we telegraphed last issue, the investor via the Central Bank’s SITME system. Venezuelan Central Bank announced the sale of a Banks, both Government-owned and private new issue, a Global 2031 bond with a coupon of ones will be able to request the issue. Government 11.95%, amortizing in three parts in 2029, 2030 and banks apparently have no limit on their orders, so that 2031. The Government would sell US$4.2 billion to they can later sell the bonds in the BCV’s SITME local investors in exchange for local currency. system, while private commercial banks can only place Reportedly, the main goal of the issue is to supply an order as large as the total requested by its clients. foreign currency to importers, with up to 40% of the The Global 2031 has been trading around 81- bond assigned to the food and health sectors. The 82 in the “when and if” market, a level that has size of the issue is large, but we understand that it surprised us so far, particularly given the size of the was increased to US$4.2 billion, so that it would not issue that will be dumped into Wall Street banks. be necessary to issue in the remainder of the year of Since most local investors only seek to purchase the Republic. Unfortunately, this is the type of foreign currency with these bonds, they either close a information the Government should inform the price upon placing the order with their financial markets directly, but fails to do so officially, for, if institution or sell immediately after the allocations are true, it would benefit bond prices. announced. This usually places great pressure on the Venezuelans were able to place orders for price of the bond, as all the supply rapidly comes to these bonds until Friday of last week and allocations market at once in this fashion. Remarkably, at current will be announced today. Investors had to place “when and if” prices the Global 2031 is trading only orders in multiples of US$3,000 and, as has been 100 bps above where it would equilibrate with the customary, there are no indications on how country’s yield curve, which is much tighter than the allocations will be decided. In the past, they have Global 2022, issued last August, or the PDVSA 2022 varied from issue to issue. Some local banks were issued last February. We expect this to widen next week as allocations are announced. For more information call: Russ Dallen, Miguel Octavio, Diana Arreaza, or Elsa Arcilla. Phone: (305)735-8280 Although the information in this report has been obtained from sources that bbo Financial Services believes to be reliable, we do not guarantee its accuracy and completeness. All opinions and estimates included in this report as of this date are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. bbo Financial Services bbo Equity Research Weekly Report One curious feature of the bond issue is that company’s total debt stood at US$29.51 billion after Deutsche Bank and Evrofinance Monarsbank are the payment of the Petrobono 2011). jointly managing the bond; the latter is a Russian Bank in which Venezuela’s development fund Caracas Stocks continue moving up Fonden owns 49% of the equity. Gazprom Bank and VTB BANK own the rest of the equity in that Local stocks continued their rise, with the bank. Caracas Stock Index rising 2.7% to close at 89,563. In the end the Government has not The most notable changes were Corimon A, which modified the official law used to issue the debt, rose 562% for the week, and Banco Provincial, which including this bond, as part of the complementary rose 2.2% at Bs. 33. Volume continued higher than Bill approved in late June. This had been an issue, the depressed average volumes of the last year on the since the size offered exceeds that specifically noted increased prospects for political change in Venezuela, in the gazette and a Global bond was not included in with 162,000 shares trading this week. The Venezuela the range of options. Clearly, such legalities are Stock Market Index is now up 37.08% for the year to simply passed over by the current Government. date. Even as bond comes to market, Venezuelan and PDVSA bonds have been strong all week, which Caracas Stock Exchange Index we believe reflects the increased interest in for the last 5 days Venezuelan assets due to an increased probability of 90,000 a medium term change in the manner in which the country is managed. 89,000 PDVSA FY 2010 In time for inclusion in the new Venezuela 88,000 bond prospectus, PDVSA finally reported its much delayed 2010 financials. The company reported net revenues of US$2.74 billion, up 31.3% over FY ’09, 87,000 slightly higher than the increase in the price of the 1 2 3 4 5 6 Venezuelan oil basket, which was up 25.35% in 2010, when compared to 2009. These revenues include all of the operations of the company, Caracas Stock Exchange for the last five days including CITGO. Earnings were down 27.99% at US$3.164 billion, due mainly to increases of 97% in expenses Debt jitters fail to hurt EM associated with social programs which went up to Emerging Markets seemed to benefit from the US$6.93 billion from the US$3.5 billion a year jitters in the US and the uncertainty on that country’s earlier and increased taxes, which went up 16.3% at credit rating and debt ceiling, as most fixed income US$3.84 billion. instruments tightened with respect to US Treasuries. The company reported production of 2.97 Even instruments from financial institutions held firm, million barrels a day, with exports of 2.40 million despite concerns of increased costs due to international barrels per day between crude oil and processed financing. products. Group Elektra of Mexico issued a bond this PDVSA’s net financial debt stood at week with a coupon of 7.25%, which was trading at US$22.98 billion at the end of 2010, most of it 98.55at issue for a yield to maturity of 7.52%. composed of bonds issued by the company. In Venezuelan bonds surprised the markets, addition, CITGO held US$1.69 billion in debt with holding firm despite the large size of the new issue, the other affiliates holding US$264 million in financial Global 2031. Most analysts were expecting a sell-off debt for a total 24.95 billion. (This included and a lower price for the Global 2031 in the when and US$2.45 billion of the Petrobono 2011, which if market. We may yet to see lower prices, but the fact matured last month, but does not include US$3 that the curve held up so well this week, closing billion of the PDVSA 2022 issued in February or the mostly up, indicates the increased interest in the US$ 1.78 billion of the recently issued PDVSA country’s’ bonds. The benchmark Venezuela 9.25 of 2013. Thus, since then, there is a net increase in 2027 was one of the few Venezuelan bonds dropping dollar bond debt of US$2.33 billion in 2011. The last week, closing at 75.4 from 75.75 the previous President of PDVSA said last week that the bbo Equity Research Weekly Report week. PDVSA 2022, the laggard on the Venezuela and PDVSA curve, rose in price closing at 85.35 from 85.25% last week, hitting an all-time high of 86 during the week. Venezuelan Yield Curve 21.00% 19.00% EDC '18 17.00% PDV '22 PDV '15,16,17 15.00% 13.00% PDV '14 YTM 11.00% PDV '27 PDV '37 9.00% 7.00% 5.00% O-06 N-10 D-14 F-19 M-23 A-27 J-31 J-35 A-39 YEAR Chart: Venezuelan Yield Curve, showing the Sovereign bonds as blue dots and some corporate bonds as red dots.