Last Friday afternoon, El Mundo reported that Diosdado Cabello, the infamous President of the National Assembly and right hand man of the late Hugo Chávez, met with foreign investors on a Venezuela roadtrip sponsored by BofA’s Francisco Rodríguez, and including representatives from Ashmore Group, Marathon Asset Management and Emso. The pictures of Cabello looking all Wolf-of-Wall-St. were quite a sight.

But then, things went funny. We had a sudden, sharp rally in VENZ paper – and not on the short-end stuff that’s been the market darling all this year. Benchmark VENZ 22s led the buying spree, even as the fundamentals suggested investors should’ve been running for the exits, with oil prices tumbling even farther as the Central Bank published a horror-film Balance Sheet. Why on earth were investors running into a sinking ship? Why were they buying up paper that matures well into what weeks ago we were assured would be the default years? What exactly did Diosdi say to FRod and friends?

Given the principals, it’s no surprise that there was little of substance made public about the outcome of this “strongly positive” exchange. Nevertheless, reading between the lines and catching cues from the Venny money flow, our guess is that that PDVSA debt reprofiling that Eulogio del Pino started talking about a few days ago is now – how to put this? – God given.

When you think about it, it’s quite remarkable that these high powered investors didn’t meet with high-ranking Finance Ministry officials, or even PDVSA people for that matter. Instead, they made a beeline to meet a político who, in theory, has little else going on besides chairing the National Assembly – a gig he is projected to lose next December 6th by a wide margin. We all know who the clowns are and who the circus ringmaster is, but normally some sense of decorum prevents these things from being done quite so openly.  

From the get-go, there was no doubt this investor trip to Caracas was more…political. What the media did not post – since no picture came out of it – is that investors also met opposition leaders (or so market gossip says). Clearly, December 06 elections are a tipping point in the Venezuelan bond market, and big Wall Street fishes want to be one step ahead of whatever political outcome flows out of an opposition victory – yes, most of them expect the oppo to win but fear tense political confrontation derived from such scenario. Remember the como sea?

It’s also a bit suspicious how well-timed this El Mundo PR perlita turned out for Diosdado: as he hosts a feel-good group shot making the rounds around the world, President Maduro was killing everyone’s buzz on Live TV announcing hard currency income has shrunk by two-thirds and that the Venezuelan oil price collapsed to a new 6-year low of 34,25 $/bbl.

More puzzling (or perhaps more telling?) the bond markets welcomed the headlines with a furious rally: VENZ and PDVSA paper rose 10% in average during the week – as some market actors already knew bajo cuerda about these meetings since last Friday -, with the long end (i.e. the kinds of bonds that had been shunned by Wall Street all year long) outperforming the short-end, which barely rose.

What this means in criollo newspeak: The first-in-line bachaqueros suddenly realized that there might be enough goods to get the party going a little longer, so they sold their very expensive spots to buy some farther away at a much lower price. Common sense and financial theory dictates that this only made sense to them if there’s something they do know (that the common folk doesn’t) that’s boosting the shop’s ability to keep giving away goods and that is not yet reflected in the price of the spots in line.

monitor bonds cc
Prices are indicative mid-point levels as of Nov 20th; Source: Bloomberg. Note how VENZ ’16 and PDVSA ’16 (the ‘first in line’ bonds) missed this rally.

 

The strangest part of this move was its total disconnect from fundamentals. Foreign Reserves are at a precarious $ 14,61 Bn., their lowest since early 2003. What’s more, the Central Bank’s own Financial Statements show an uglier picture under the hood, with a lot of creative accounting and mark-to-market gymnastics behind the Reserves number. And strangest of all, the apparent breakdown of the connection between oil and Venny bond prices:

chart bonds cc
Prices are indicative closing levels over the last 6 months; Source: Bloomberg. The V22/WTI ratio, a measure of relative movement between the two assets, shows extreme strength in VENZ bonds unmatched with the weakness of crude oil since early October.

 

Considering all this, it seems like El niño Jesús (or rather Wall Street) will give Eulogio Del Pino the Christmas present he asked for: the Re-profiling of PDVSA short-term bonds.

There’s no other way to explain why the market went suddenly crazy for the longest-dated portion of CCC-rated junk, right at the moment where all the key variables suggest these bonds should be worth pennies on the dollar. There is somebody who’s obviously very happy with the headlines, though: lil’ Diosdi was pilas enough to grab the political reward in a time where he could really use some to avoid losing his job.

 

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Russian-Venezuelan, Caraqueño born and raised, stuck between an addiction to High Beta and total despair over the future of VennyLand. Strategist at Knossos Asset Management, views are his own.

42 COMMENTS

    • Jajaja que pregunta tan dificil de responder. Digamos que es muuy buena para ti, si tenías bonos antes de la semana pasada.

      Para el país? El tiempo lo dirá. Yo soy generalmente pesimista y creo que a PDVSA se la van a clavar durisimo con cualquier acuerdo de canje o reperfilamiento de deuda que logre con sus acreedores. Sin contar con el hecho que el gobierno sigue poniendo los intereses de Wall St por delante de los de su pueblo.

      But hey, “El show debe continuar”…

      • Bueno, hay que sacar algo bueno de eso, imagina como será de útil esto para destruir al chavismo luego de sacarlos del poder cuando se le diga a la gente que pasaron dos décadas de hambre y miseria porque sus supuestos libertadores sólo estaban pendientes de llenarse los bolsillos.

  1. They all look like a bunch of salivating hyenas sniffing around Venezuela’s bolibanana corpse. What else can you say. except to hope that CapoCabello and a perhaps a few of these international chinito crooks will one day be brought to Justice. But they will all enjoy an early retirement in the Caribbean, rest assured. Because we are so nice, and forgiving, and ready for the next generation of Thieves.

  2. Or… they sold the short end of the curve to the investors that believe that 2016 payments are covered and doubled down (or more) the face value of their positions by going longer on the curve while everyone is in panic mode, in the meantime they collect a monster current yield AND in any case they are buying at close or below recovery value.

    Brilliant move!

    • Yes it definitely makes sense. But I wouldn’t dare say that V22’s at 52.00 is ‘close or below recovery value’ 😉 I think the guy who sold pdvsa 15 at par to buy venz 22 below 40 during August 24th ‘Black Monday’ (whoever he is, respect!).. that was the killer trade.

      • Of course that RV is not 52 or 53, but that is the price today. But this guys, including Diosdado “insider trader” Cabello, are always a few days ahead.

    • César, César…Diosdado would never share sensitive details of negotiations he was about to undertake with connected cronies in a position to profit big from them! Why the very thought of it!

      Pass me the smelling salts!!

    • You’d be amazed of all the shenanigans people get away with when trading Sovereign bonds (as is VENZ). To say its an opaque market is the understatement of the year. This is one (alleged) crime that sadly would be extremely difficult to prove.

  3. Sorry but I can’t see it. At these yields, how the hell are they going to reprofile? You need something good to sell to investors to bring yields down to more normal levels.

    • Hello Andrés. If you can point out one or two main questions you have about this post, that will help us a lot explaining it all to uu anybody else interested.

      Anyways, here it goes:
      1. Some fund managers that invest in bonds issued by the Republic and PDVSA met with Diosdado. They came back veery happy from the meeting.
      2. These bonds rose in price on the secondary market before and after the fact (when bond prices rise, that means people like these fund managers are, in general, buying more than selling; basically that there’s demand for the government’s debt).
      3. It’s strange that bond prices are rising when tge price of crude oil is falling (bewides our economic disaster); these two variables usually go hand in hand.
      4. We conclude that bonds are rising because whatever Diosdado spoke with those investors (no public info about it), it surely has to do with a proposed change in the composition of PDVSA’s debt that will help reduce the chances of the company going bankrupt next year (which is what most people thought would happen in 2016).

      • Thanks, Daniel, great explanation. Now I have two questions:
        1. Why is Diosdado talking about PDVSA’s money? (I supposed that is because he is ‘el que manda’).
        2. This possible change in the composition of PDVSA’s debt how affects ‘el pueblo’?

    • Neither do I but here’s my take:

      1.The economic situation in Venezuela remains dire;
      2.Wall Street guys meet with alleged drug kingpin to discuss Venezuelan debt;
      3. They all come out smiling;
      4. Value of Venezuelan debt spikes.
      5. Nobody knows why.

  4. Y si en vez de darle un significado financiero, se le da un significado político. Maduro creó sale tarde o temprano después del 6D. Cabello creó continúa. Que intenciones tendría FRod con esa reunión?

    • Y dale con este teclado. Disculpas!!!Mandingo November 24, 2015 at 9:58 pm
      Editado:
      Y si en vez de darle un significado financiero, se le da un significado político? Maduro creo, sale tarde o temprano después del 6D. Cabello creo que continúa. Que intenciones tendría FRod con esa reunión?

  5. How can the word of Diosdado be louder than the macro economic indicators? I remember watching FRod being interviewed by “Wladimir a la 1”, and he seemed suspiciously optimistic about the long term position of the bonds (http://archivo.globovision.com/director-del-bank-of-america-es-improbable-que-venezuela-caiga-en-default/). If the outcome of 6D is not what every reader of this blog wants, “ni siquiera el piso” will stop the fell of the bonds.

    • Yeah they could plunge even with an oppo victory… Its called ‘buy the rumor, sell the news’. Wall St’s oldest trick in the book, lol

  6. The amazing thing to me is that everyone (Wall Streeters included if the report is true) are assuming that God-Given will be able to exert control over the economy even if he is voted out of office in a few weeks. The plan to reprofile belongs to this administration. What happens when they get voted out? Capriles, for example, is a highly trained tax attorney who we can only hope would throw the brakes on any economic plan or reprofiling that was not favoring the country en toto. Surely the first order of business is to seize the passports of high ranking Chavistas and conduct a financial investigation per their assets. Might be interesting to see what happens to God Given and others when they try and step off the continent.

  7. to re-profile PDVSA’s debt has almost NOTHING to do with the National Assembly or the Central Government (except the Finance Ministry).

    Not seeing that one, Guillermo. Insofar as the PDVSA was basically appropriated by Chavez, all PDVAS goings on are brokered by central government heavies. Are you saying that if said heavies ) God Given in this case) can influence the PDVSA profile now, that they are in power, if and when they get voted out, the new heavies won’t be able to influence or steer the PDVSA to their own means?

  8. Esta reunión ha sido considerada como muy positiva y ha generado un repunte en la compra de bonos venezolanos que maduran a corto plazo. Es decir, ha servido para inspirar confianza a los compradores de bonos de que en Venezuela no habrá cesación de pagos a corto plazo.
    No soy un conocedor de este mundo de las altas finanzas pero esta reunión me suena mucho más a especulación financiera que a una siembra genuina de confianza para atraer inversiones de verdad (no simples compradores de bono en un mercado volátil). Por qué digo esto?

    · Porque Diosdado Cabello no es la persona que puede explicar la verdadera situación financiera del país, ciertamente no es la persona indicada para explicarla a los “inversionistas” visitantes.
    · Porque los “inversionistas” ni visitaron al Ministro de Finanzas ni a PDVSA, quienes sí podrían decirles cual es la situación, (si fueran gente honesta)
    · Porque no es necesario visitar Venezuela para saber que la situación financiera del país es desesperada
    · Porque los visitantes no parecen ser de grandes ligas sino un grupo de segundo nivel, reunido por Francisco Rodríguez, quien parece seguir empeñado en ser Ministro de Finanzas de Venezuela, sin darse cuenta de que apenas sería jefe por nueve días en un gobierno agonizante.

    Quizás más indicativa de la verdadera situación financiera del país es la noticia, paralela a la visita, sobre unos 25 a 30 tanqueros cargados de petróleo y productos importados por PDVSA que se encuentran en radas y puertos venezolanos y de Aruba y Curazao sin poder entregar su mercancía a PDVSA porque los dueños de los cargamentos le exigen a PDVSA pre—pago. Es decir, no confían en que – una vez entregados sus cargamentos – PDVSA les pagará, ya que saben que la empresa está “in extremis”. Esta noticia es mucho más poderosa como indicadora de la situación financiera venezolana que las palabras de Diosdado Cabello a un grupo de “inversionistas” internacionales.
    Pudiera ser que mientras los suplidores de PDVSA no quieren desembarcar el petróleo para PDVSA si no hay pago “chin chin”, Diosdado Cabello quiere “embarcar” a posibles compradores de bonos venezolanos, con la colaboración de algunos especuladores financieros.

    • El Dr Coronel senala algo importante Si hay dudas de que Pdvsa no puede pagar a sus suplidores foraneos de productos refinados (e.g. componentes de gasolina) y de crudo liviano ( o a los armadores que los transportan) entonces el resultado inevitable sera una merma o suspension en las exportaciones que generan los ingresos de los que vive el regimen y por ende el impago de sus deudas financieras pendientes !!

      Ya todos sabemos que sin las importaciones de productos refinados y de crudo liviano Pdvsa no puede exportar el crudo extra pesado de la faja ( que solo no es ni transportable ni vendible) y enrenta dificultades para producir la misma gasolina que consume el pais. Esto no es un secreto para nadie.

      Es posible que el regimen este preparando un paquete como el que recomiendan los economistas mas serios despues de las elecciones y que ello eleve la confianza en la capacidad del pais para balancear sus finanzas y pagar sus deudas aunque no lo anuncie por razones electorales y que la existencia de tal plan sea divulgada a ciertos selectos tenedores de bonos para inspirar su confianza , en tal caso lo que llama la atencion es que sea DDC el hombre del regimen cuya presencia en estas reuniones sirve para confirmar la existencia del paquete y no otros mas ligados a la gestion economica !!

      Con todo seria bienvenida la noticia que se estan rodando los plazos de pago de la deuda Pdvsa hacia el futuro aunque sin saber el costo adicional que ello conlleva y el perjuicio quizas grande que ello puede acarrear a la situation futura de Venezuela .

    • En vez del “Donde estan los reales,” lo mas importante es “Donde estan los tqnqueros?”
      Ask Schlumberger or Helmrich and Payne, among others, about PDVSA’s paying for products and services rendered. If the tankers are waiting to get paid before they deliver their products to Venezuela, there is good reason for their having done so.

      • It is not just tankers with cargoes waiting to be paid.

        I have noticed over the past 3 or 4 months an increasing number of ships with bulk cargoes of grain, corn, fertilizer, etc. bound for Puerto Cabello waiting sometimes for up to 6 to 8 weeks just outside of Venezuelan territorial waters. I have been in shipping for over 30 years and in my experience the only credible reason for these ships to wait is that the cargo has not been paid for and the owner of the ship has been told to stop, and then the owner must also receive demurrage for he time the ship has been waiting and the owner enforces his rights to be paid and this compounds the problem and the costs.

  9. In the normal world I could accept the relative transparency of bond dealing to follow a set pattern. In fact here we have Ven crude falls and the bond values increase ? And that has everything to do with restructuring shorterm debt ? That’s ok but this is Venezuela managed by narcotraficantes intent on avoiding prison time and increasing their Andorra accounts.
    So I can only conclude there’s something a bit dodgy going on here. Call me cynical but here are my options bearing in mind Cabello is a scumbag and fund managers are……..

    A
    Indication by Cabello that the game is up. That’s positive for the fund characters as Venezuela, apart from its debt, will require a lot of restructuring itself. Maybe the culprits will be those financially benefitting in the above process wink wink.

    B
    cabello and co restructuring their ill gotten gains via the bonds, or similar, as part exodus or part investment in projects using PDVSA as the vehicle.

    C
    Washing money and securing within fund managers complex instruments so that the lost billions are untouchable.

    D
    And if there is a political change in restructuring dumps a major problem on a future government.

    E
    All of the above.

    History should have taught us that chavismo may be many things however egocentrism is their core value.

  10. I don’t know bonds from a hole on the ground, but if I was Dieudonné I would STFU about economics, and just say that the oppo will indeed win the parlamentary elections, and that we will let them take the financial decisions. Hocus-pocus, my debt is no longer worthless!!!

  11. Esto es bueno desde el punto de vista económico pero malo desde el político. Es como los acuerdos con China: aliviar la carga financiera de un gobierno irresponsable con cero disposición a reformar es correr la arruga y condenar a los venezolanos a la desgracia en el futuro. Buen artículo!

  12. A naive question to specialists in this forum: What is good for investors (and for international portfolio managers) is also good Venezuela? What about conflict of interests? Is the macroeconomic path road being proposed by some of them aligned to their short term (shortisimo) benefits and not necessarily Venezuela’s?

  13. Many rhetoric here.
    The thing is PDVSA will reprofile PDVSA2017N and PDVSA207 old. they need to make sure the Biggest bond holders are OK with the terms. As Venezuela is already owner of 20-25% of those bonds . they only need the very big fish to agree in order to reprofile lets say 60% total . The retail will follow suit ir not.

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