VENZ36: Insult to Injury

We’ve run out of metaphors to describe the sickening vandalism of Venezuela’s public finances. The specifics of the VENZ36 deal admit just one word: obscene.

Less than a week after perhaps the dirtiest financing deal in Venezuela’s history, the WSJ is reporting a bigger, badder monster is on its way. Citing several US-based hedge funds, Matt Wirz, Kejal Vyas and Carolyn Cui report the Maduro government is using Chinese brokerage Haitong Securities to market the mother of all fire-sales:

Five billion dollars face value of VENZ 6.5% 2036 bonds for the ridiculously low price of 20 – TWENTY – cents on the dollar.

It’s hard to come up with appropriate metaphors at this point. Last week, Muci wrote that selling the PDVSA 22s at 31 cents was like selling the electric wiring in your own house for scrap to get high on meth. This? Well…this is whatever it is you do to get high next, after the heater’s gone, after the furniture’s gone, after there’s no more wiring to hawk and you need to get high right fucking now. Remember the last scene of Requiem for a Dream?

Selling these bonds at 20 cents on the dollar is obscene. Yesterday, comparable bonds maturing in 2038 were trading for 45 cents.

Quick recap: like the PDVSA 22s that made the news last week, VENZ 36s are “phantom bonds”. Rather than selling these bonds into the open market like Bolivia, Ecuador, or any other country on earth, the government issued them in a private placement to itself late at night on December 29th, 2016, just before the 2015 budget law that authorized them expired.

State-owned Banco de Venezuela bought the entire $5 billion issue in bolivares at the scrumptious official rate — 10 BsF:$1. And voila, thus the phantom bonds were born. The whole thing was kept under wraps until the first working day of 2017, so the legal status of the bonds is a huge question mark. So big, in fact, that over 80 Wall Street firms allegedly passed on buying them, despite the 80% discount.

Selling these bonds at 20 cents on the dollar is obscene. Yesterday, comparable bonds maturing in 2038 were trading for 45 cents. That the bond is pricing at less than half the going rate is a clear indication that the buyer knows full well that the bonds and their sale probably isn‘t even legal.

For starters, the buyer gets a ludicrous current yield of 33% in dollars – meaning they recover a third of the investment every single year from coupons alone. In just three years, the buyer will get all their money back and then they’ll get their money back again every three years thereafter, over and over until 2036… at which point they’ll get five times their original $1bn when the bond amortizes. In total, the buyers of these bonds are slated to get a 1018% total return or 11.2x their money back. In other words, Venezuela will get $1bn today and pay out $11.2 billion thorough 2036.

That is, of course, assuming that the bonds get paid back. As with the PDVSA 2022 bonds, the legality of these Venezuela 2036 bonds is dubious, at best. Don’t shed too many tears for whoever the buyer ends up being: when you’re bankrolling a distressed debt issuer on these conditions, it’s because you never really expect the principal to be repaid.

On top of all that, the bond itself is funky. As the Journal reports, “the debt securities being shopped by Haitong aren’t registered with the international organizations that settle transactions, meaning they cannot be traded electronically, a risk investors said was keeping them from buying them”.

Sounds legit, right?

The Bigger Picture

Look, for a distressed debt issuer, refinancing debts and smoothing payments (“liability management,” in Street jargon) is always tricky. The more distressed the issuer is, the sweeter the “sweeteners” need to be to get lenders to accept refinancing operations and new debt issues. Sweeteners range from big discounts on new bonds, collateral to guarantee some, all, or even more than 100% of the face value of the new bonds (overcollateralization), to warrants on GDP growth or oil prices (like Argentina’s GDP warrants). All of these options are costly.

Venezuela is the world’s most distressed issuer right now and has little choice but to load on the sugar.

But there’s a limit.

You have to attract investors. Pile on too much sweet stuff and what you signal is desperation; desperation of the kind that repels the investors you’re trying to attract. Make promises too extravagant and you accept terms so onerous it’s plain you won’t be able to make good on them.

Both the PDVSA 6% 2022 bonds and now this Venezuela 6.5% 2036 risk giving creditors diabetes. Sweeteners this extravagant double up as a warning flag that nobody can miss. Adverse selection kicks in. Reputable investors bow out of the deal. The only ones left are the denizens of the financial underworld. The government and PDVSA are reaching pretty much every financial blacklist that matters, adding to the Trump administration’s discussion about sanctions.

Only a handful of banks are willing to deal with Venezuela, and even then only as long as they operate through third parties and keep dishing out those super-juicy discounts. That’s how Wall Street works. But that’s not our main problem here.

Pile on too much sweet stuff and what you signal is desperation; desperation of the kind that repels the investors you’re trying to attract.

The problem is that the government is willing to sell Venezuela at 20 cents on the dollar, right after they sold another part of Venezuela for 31 cents. That’s the international price of isolation, economic mismanagement, political radicalization, and lack of creditworthiness. Not even when oil prices were below $30 a barrel, did PDVSA and Venezuela bonds trade at 20 cents.

If you wanted the real cost of almost two decades of chavismo to the country, there it is: eighty-freaking-percent.

But why? Is this only desperation to meet short-term debt service and imports needs? Is the government’s time horizon really this brutally compressed? Did they forget about the next 20 years of public administration outlined in the “Plan de la Patria”?

This time it’s different. It seems like the government’s sights really don’t go beyond July 30th. Their willingness to go ahead with an everything-must-go liquidation sale at 20 cents, when similar Venezuelan bonds are trading at 45 cents, tells a story beyond debt itself or even avoiding default. This is more than “willingness to pay” taken to the extreme. It’s suicidal.

In other words, do you really think at this point that chavismo cares about the year 2036? Or 2022, for that matter? With these transactions, it’s clear they’re not thinking beyond the next scheduled presidential elections, if that. The Constituyente narrowed their survival timeline. When you’re willing to do something this desperate, it’s because it would make it for your departure ticket, y que el último apague la luz. One last plunder of the vaults before jumping off the sinking boat.

Either that, or you’re fire-selling the last sources of cash in the short-term to hold the line against the political storm. Even if that means compromising your entire financial position, what’s left of an already depleted liquidity, and whatever firepower imports to keep the control of the crowds with freebies and regulated products. They know there will be no calm after this storm.

Chavismo was willing to do anything to reach power. And perhaps it’s willing to do even more in order to keep it. It doesn’t matter if it means selling their own mother and kidneys to capitalism incarnate. Power is everything, at all costs.

“La Revolución

Se vendió

A Wall Street”


…por migajas.