SUMMER BONDING IN VENEZUELA

UNCLAS SECTION 01 OF 02 CARACAS 001554 SIPDIS SENSITIVE SIPDIS TREASURY FOR MMALLOY AND KAUSTIN COMMERCE FOR 4431/MAC/WH/MCAMERON ENERGY FOR ALOCKWOOD AND CDAY NSC FOR JCARDENAS HQ SOUTHCOM ALSO FOR POLAD E.O. 12958: N/A TAGS: EFIN VE SUBJECT: SUMMER BONDING IN VENEZUELA REF: A. 06 CARACAS 3375 ¶B. CARACAS 493 ¶C. CARACAS 667 ¶D. CARACAS 741 ¶E. CARACAS 844 ¶F. CARACAS 1292 ¶1. This message is Sensitive but Unclassified, please treat accordingly. ¶2. (SBU) SUMMARY: Venezuela is preparing a third "bonos del sur" issue for August or September which according to reports will be announced formally during Chavez' upcoming August 6 visit to Argentina. The expected announcement to purchase an additional USD 1 billion of Argentine debt would bring Venezuela's total purchase of Argentine debt to around USD 5.4 billion. The first two such issuances (reftels A and B) combined Argentine and Venezuelan debt and were sold locally to Venezuelan investors. Demand for these instruments is primarily driven by the dollar-denominated Argentine portion of the issuance which can be re-sold in secondary markets outside of Venezuela for dollars. PDVSA is also rumored to be planning another USD 3 billion-plus issuance, and the Ministry of Finance has restarted selling bonds and structured notes locally. Given the pent-up demand for dollars driven by currency controls and political uncertainty, investors are looking to sell the bonds at a discount abroad in order to obtain dollars at an implicit rate below the parallel exchange rate, which is hovering near Bs. 4300/dollar. END SUMMARY. ¶3. (SBU) The Venezuelan and Argentine press reported on July 29 that Venezuela would purchase USD 1 billion worth of Argentine Boden 2012s and 2015s during Chavez' upcoming August 6 visit to Buenos Aires. Minister of Finance Rodrigo Cabezas confirmed on August 2 that a bond issue was near, though declined to give the date or terms of the issuance. The Argentine newspaper Clarin has reported that the issuance will be formally announced during the week of August 6 and will be for an initial USD 500 million, followed by two smaller USD 250 million tranches later this year. Post estimates that Venezuela has purchased approximately USD 4.4 billion worth of Argentine debt (so this would raise to total to around USD 5.4 billion, or USD 5.2 billion according to the Argentine newspaper Clarin). Post estimates that the BRV currently holds between USD 1-2 billion via its off-budget National Development Fund (FONDEN). (Comment: It is unclear whether this Venezuelan purchase of Argentine bonds is in addition to the USD 1.2 billion (USD 400 million in Boden 2012s and USD 800 million in Boden 2015s) that Venezuela reportedly may have obtained sometime during the first quarter of 2007 or whether it is merely a formal announcement of this open secret. If it is the former then Venezuela's purchases of Argentine debt could amount to as much as USD 6.2 billion. End Comment.) ¶4. (SBU) On August 2 Cabezas also confirmed that the BRV planned to purchase Bolivian debt for a future bond issuance with that country. According to Cabezas, the issuance will amount to USD 100 million, however the BRV plans to purchase the debt from Bolivia in USD 10 million installments. Chavez hinted at future "ALBA" bond issuances during the most recent ALBA summit on April 28-29 (which would presumably combine Venezuelan, Nicaraguan, and Bolivian debt) (reftel E). Local analysts believe that the long lag time between announcement and issuance of these bonds is related to Venezuela and Argentina's current financing needs (or lack thereof) as well as falling demand internationally (due to tightening credit markets and rising spreads for emerging market debt). The local demand for these instruments is driven by their implicit exchange rate. If a USD 100 bond sells for Bs. 215,000 locally, and can be resold for USD 60 on international markets, then its implicit cost in bolivars is Bs. 3440/dollar. This in turn allows Venezuelan's to obtain dollars at Bs. 3440/dollar instead of the parallel rate of Bs. 4300/dollar. As of August 2, Boden 2015s were selling near 83 percent of face value and Boden 2012s (which have a lower coupon rate) at 57 percent of face value. ¶5. (SBU) The local parallel market has risen steadily after a CARACAS 00001554 002 OF 002 leveling off near Bs. 4000/dollar during June and most of July as the Ministry of Finance began selling dollar-denominated structured notes (comprised of Venezuelan, Ecuadorian, Colombian, and Brazilian debt) to local banks (reftel F). There have been no sales during the past three weeks and coupled with threats by National Assembly deputies to make the parallel market illegal this decision has reduced supply and increased demand for dollars. The National Assembly is debating a revision to the Law Against Illegal Foreign Exchange, which governs the currency control regime and allows for parallel market transactions. Despite early indications that the proposed revisions would have eliminated the language protecting the parallel market, Deputy Iroshima Bravo announced on July 26 that the parallel market would not be touched by the planned revisions. The Deputy's announcements are not quelling the market's jitters and, as of August 2, the parallel market rate is Bs. 4300/dollar. ¶6. (SBU) On August 1 the Finance Ministry issued Bs. 200 billion (USD 93 million at the official exchange rate) worth of domestic 2012 TIFs (fixed interest instruments). This is after a failed auction at the end of July to issue 2020 TIF notes. Apparently local investors were uninterested in holding Venezuelan debt for such a long period. The 2012 TIFs pay a 9.5 percent coupon and mark the first domestic debt issuance since the second "bono del sur" in February ¶2007. On August 2, Cabezas announced that the government would issue up to USD 3.7 billion worth of debt during the remainder of 2007, in part to soak up excess liquidity. Cabezas has previously said that the government would not take on any new liabilities in 2007, but could issue new debt as part of a buyback program. ¶7. (SBU) PDVSA is rumored to be considering another large debt issuance (USD 3-3.5 billion) to follow up on its massive USD 7.5 billion issuance in April 2007 (reftel C and D). PDV2017s are trading at 75 percent of face value and PDV2027s and 37s are trading at 65 and 63 percent of face value, respectively, on international markets. Bond sector contacts are mildly skeptical that PDVSA would be able to place another large issuance at this time given the current appetite for PDVSA and Venezuelan debt and increasing yields for emerging market debt as a whole. However, analysts from a major rating agency did not expect they would have any problem given the oversubscription of a recent large issue in a nearby country, and the amount of global liquidity. As of August 2, the risk indicator on Venezuelan sovereign debt was 361 basis points over U.S. treasuries, well above Colombia (172 points) or Brazil (200 points). ¶8. (SBU) COMMENT: Chavez continues to use debt instruments to help his friends (or reward their loyalty),and future bond issuances with allies, including Argentina, Bolivia, Ecuador, and Nicaragua should be expected. Venezuela's domestic demand for dollar-denominated assets guarantees a market for bonds which countries would have trouble placing internationally. The spike in Venezuela's risk indicator and the postponement of debt issuances by Argentina, Venezuela, and PDVSA are more likely related to the ongoing turmoil in international debt markets than domestic factors. While investors certainly place a political risk premium on Venezuelan debt as compared to other members of the Emerging Market Bond Indicators (EMBI) group, the premium up tick in recent weeks does not seem related to any of Chavez' shenanigans, but rather to a general market move by bondholders to quality. FRENCH