Venezuela deal: the good and the bad, from IDEAglobal's Alvarez; EMBI-plus tightens by 7 bps

By Paul A. Harris

St. Louis, Sept. 29 - The EMBI-Plus index was at 335 bps bid at Tuesday's close, tighter by 7 bps on the day, according to a market source.

Latin American emerging markets debt continued to grind higher on the day, according to Enrique Alvarez, global head of Latin American research for IDEAglobal.

Brazil led the way, Alvarez said.

Peru also traded better on the day.

The liquidity of the market, rather than any headline news, drove Tuesday trading, Alvarez added.

Venezuela pricing surfaces

Venezuela announced the minimum and maximum price ranges for its $3 billion bond auction on Tuesday: the minimum price will be 135% and the maximum price will be 140%.

Orders will be taken until Friday.

The finance minister will determine the final price on Oct. 6.

The deal will be comprised of $1.5 billion of 7¾% bonds due Oct. 13, 2019 and $1.5 billion of 8¼% bonds due on Oct. 13, 2024.

Deutsche Bank and Citigroup will run the books for the Regulation S deal.

Venezuela: the good news

With Venezuela's dollar-denominated bonds set to price at a premium of between 135% and 140%, the deal is definitely good for the government, IDEAglobal's Alvarez pointed out during a Tuesday conversation with Prospect News.

Given the respective 7¾% and 8¼% coupons, the yields will be very attractive indeed.

The deal will also provide a means for local economic participants to access foreign exchange, the strategist explained.

Venezuela's official exchange rate is VEB 2.15 on the dollar, Alvarez said.

The black market, or "parallel" rate is somewhere above VEB 6.00.

That means another reason that the deal is set to come at such a notable premium is so that the pricing will come somewhere in between the government's arbitrary VEB 2.15 exchange rate, and the VEB 6.00-plus rate that is the result of actual supply and demand.

"The deals are priced where they can be paid for in bolivars," Alvarez said.

"The government is trying to absorb bolivars that are dedicated to that market, by allowing people to buy these bonds.

"By the same token the government obtains very cheap financing off of this, because, instead of yielding 7¾% or 8¼%, the yield the government is paying is minimal if they are pricing the bonds at 135% or 140%.

"So it could potentially filter some positives into the inflation picture," the strategist added.

Venezuela: the bad news

Asked if the positives in the "foreign exchange" and "inflation" pictures trump the fact that Venezuela ultimately is getting under another massive amount of debt, Alvarez replied that only time will tell.

"Over the course of the next few weeks the bonds will become tradable dollar-denominated debt," he pointed out.

"It remains to be seen whether there will be sufficient demand to digest that debt.

"In past instances it hasn't taken that much of a toll on the market. However right now Venezuela has numerous economic and political problems."

Venezuela's existing bonds.

News of the $3 billion deal failed to kindle a massive sell-off in the south American nation's existing bonds, Alvarez said.

There was a small amount of sell-off on the long end of the Venezuela maturity curve, on Monday. But those bonds essentially retraced lost ground on Tuesday.

Venezuela's 9¼% global bonds due September 2027 ended the Tuesday session at 80 bid, 81 offered, up ¾ point on the day.

However the short end of the Venezuela maturity curve suffered "a slight downdraft" on Tuesday, Alvarez said.

The 8½% bonds due October 2014 went out 88¾ bid, 90 offered, down 1¼ points on the day.

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