Once again, Venezuela successfully entered the international financial markets. Last September 22nd,the Republic launched into the market 1.5 billion U$ in global bonds, due in 2014, which it will use to exchange for short term Brady bonds -all within the context of a refinancing program of the public debt- and obtain fresh cash for other projects.

And as if that were not enough, Tobías Nóbrega, the minister of Finance himself, was in New York the same day the operation was carried out, explaining to the investors the advantages of investing in the “oil-country”.

The country is at a stage of abundance that has enabled it to put its big accounts in order and to improve its image abroad, a situation that may last until oil prices begin to drop from their current astronomic levels. But so far it seems that the flood of petrodollars is secured for quite some time.

The value of the 2014 global bond, will be determined in a Dutch auction, in which every holder will make a bid based on the return of the United States Treasury Bonds due in 2014.

The exchangeables

The bonds liable to exchange are the Front-Loaded Interest Reduction Bonds “Flirb”, due in 2007, whether in U$ (A and B series), or in pounds, Swiss francs, and deutsche marks.

They will also be exchangeable for Debt Conversion Bonds (DCB’s) in U$ (DL series; due in 2007, and IL series, due in 2008) and in deutsche marks and pounds (due in 2007).

The Brady bonds -backed by US Treasury Bonds- are bank loans restructured as publicly negotiable instruments, in response to the Latin American financial crisis of the 80’s, sadly remembered as “the lost decade”.

Venezuela is not considering the exchange of its shortest term Brady bonds since “they represent too small an amount: 20 million U$, due in 2005.” , said Alejandro Dopazo, Public Credit director of the Ministry of Finance.

Part of these short term instruments were repurchased by Venezuela last year, when it made a debt emission in order to repurchase debt by parallel means. The liquidation date of the most recent operation, led by Barclays Capital and Merryll Lynch, will be on Oct 8th.

Venezuela, the world’s 5th largest oil exporter, repurchased part of its short term Brady bonds as part of a program meant to alleviate the expiration curve, that was concentrated between 2003 and 2007.
The plan included exchanges, repurchases. and debt emissions for over 7 billion U$, under different conditions in the external as well as in the internal market.

Venezuela’s new entry in the foreign market takes place after considerable improvements in its external debt’s “report card grades”, issued by risk analysts, as a consequence of what these analysts consider a decrease in political uncertainty after president Chávez’ ratification in power. These agencies had been criticized by the government in the past, for considering their assessments of the country inaccurate.

With good grades... for the time being.

Fitch ratings gave the emission of 2014 bonds a “B+”, while Standard and Poor’s Rating Services gave it a “B”. Fitch said that the expected rating for the emission is stable. It added that Venezuela’s solvency has improved as a result of a decrease in the political uncertainty related to the presidential referendum held in August, and to a greater international liquidity.

The long-term credit risk remains high, given the volatility of the government’s incomes, half of which come from oil exports.
The structural fiscal balance has clearly deteriorated this year.
On September 20th, Fitch had improved its rating for Venezuela by two levels, basing its decision upon Chávez’ recent victory in the referendum, and on its greater liquidity abroad.

Fitch made its decision after Moody’s and Standard & Poor’s had also increased the country’s grading, after the president’s victory. Fitch said that Venezuela now has 21.3 billion U$ in reserves; much higher than the estimated 5.4 billion U$ payment of its foreign debt in capital plus interests due next year.

Compared with other “B” category bond issuing countries, Venezuela stands out for having a very low net external debt, explained Fitch.
But the firm warned that that the credit risk remained high because of the volatility of the government income, which relies heavily on oil.

Fitch also pointed out that Chávez’ government’s high public spending means that the country has not been able to efface its budget deficit, despite the sharp increase in oil export sales income this year, and that such deficit might keep up in the future.

“As oil prices decline in the future, it will probably be politically difficult to reduce government spending in a proportional way; therefore, the nominal deficit could increase, unless a substantial devaluation takes place” said the agency.

Published in Quantum No.33

Maitane Larrañaga