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Prepared by: VMWM Research Department; January 7, 2013
Page 1 of 11
Venezuela: Summary Bond Terms
Venezuela Bonds 12.75%, 2022 9.25%, 2027 9.25%, 2028 7%, 2038
Issuer Bolivarian Republic of Venezuela
Currency USD
Issue Date August 23, 2010 September 18, 1997 May 7, 2008 November 15, 2007
Tenor at Issue 12 Years 30 Years 20 Years 31 Years
Time Remaining Till
Maturity
10 Years 15 Years 16 Years 26 Years
Duration 5.59 7.82 7.93 10.27
Maturity Date August 23, 2022 September 15, 2027 May 7, 2028 March 31, 2038
Maturity Type Sinkable Bullet Bullet Bullet
Coupon 12.75% p.a semi-annual
(February & August)
9.25% p.a. semi-annual
(March & September)
9.25% p.a semi-annual
(May & November)
7% p.a semi-annual
(March & September)
Day Count Basis 30/360 30/360 30/360 30/360
Bond Rating B2 (Moodys; Dec 2012), B+
(S&P; Dec 2012), B+ (Fitch; Dec
2012)
B2 (Moodys; Dec 2012), B+
(S&P; Dec 2012), B+ (Fitch;
Dec 2012)
B2 (Moodys; Dec 2012), B+
(S&P; Dec 2012), B+ (Fitch; Dec
2012)
B2 (Moodys; Dec 2012)
Issuer Rating B2 (Moodys; Dec 2012), B+ Neg
(Fitch; Dec 2012)
B2 (Moodys; Dec 2012), B+
Neg (Fitch; Dec 2012)
B2 (Moodys; Dec 2012), B+ Neg
(Fitch; Dec 2012)
B2 (Moodys; Dec 2012), B+
Neg (Fitch; Dec 2012)
Use of Proceeds General Corporate Purpose Repay / Refinance Debt Repay / Refinance Debt Repay / Refinance Debt
Governing Law New York New York New York N/A
Recommendation Buy Buy Buy Buy
Prepared by: VMWM Research Department; January 7, 2013
Page 2 of 11
Venezuela Bonds - Analysis
Country Overview
The Bolivarian Republic of Venezuela is characterized by its overdependence on the
petroleum industry (accounts for approximately 95% of export earnings; 2.5 mill ion
barrels per day and roughly 30% of GDP) and high sensitivity to exogenous shocks.
Along with vast petroleum resources, the country also owns natural supplies of iron ore,
hydroelectric power and diamonds. However, the country’s economic and political
fortunes are closely intertwined with the fate of its president, Hugo Chávez, who enjoys
54% of the popular vote and recently won re-election to begin his third term, extending
his rule of 13 years for another 6 years. Currently, Venezuela faces a series of challenges
which come in the form of a weakening of democratic institutions through the break
down in human rights and basic freedoms, divergence of political interests and drug-
related violence. This means that the current administration is pursuing strategies
contradictory to any democratic movement. Instead of equality and social justice, the
administration stifles the human rights of citizens and engages in blatant political
discrimination with the utmost disregard for the rule of law. In conjunction with this,
President Chávez has sought to further increase government intervention in the
economy through the continued nationalization of firms in select industries as he
pursues a form of 21s t century socialism. Chávez is known to popularly util ise the
country’s oil wealth to roll out numerous social programmes catered towards the less
fortunate while simultaneously exercising vast political control over most economic
sectors and their operations. It is with this in mind that one must be cognizant of the
instability and uncertainty within Venezuela and the wider region that will occur if he is
incapable of holding his position as President and leader of the United Socialist Party of
Venezuela.
President Chávez is now 58 and has a history of fighting cancer. Although he had
announced in July 2012 that he was free of all cancer cells, he was re-admitted to
hospital in mid-December with a recurring type of pelvic cancer. This is his fourth surgery
Prepared by: VMWM Research Department; January 7, 2013
Page 3 of 11
since June 2011. At this time it is unclear whether he will be able to retain his office,
which has given rise to uncertainty as to the political fate of the country. Immediately
before leaving for Cuba, Chávez announced his successor Nicolas Maduro to carry on
the work of his socialist party. Maduro is currently the Vice President as well as the
Minister of Foreign Affairs and has been previously widely ridiculed for his former
occupation as a bus driver. Overshadowing this is the praise he has received for his
easy-going and affable nature while being deemed as a faithful ambassador of
Chávez’s views. Nicolas Maduro is highly respected among President Chávez’s inner
circle and is described as the most capable administrator and politician to carry on his
work. In the event that Chávez is unable to return to Venezuela in time for the
scheduled January 10, 2013 inauguration, elections may have to be held within 30 days
unless the constitution is amended to state otherwise. The bond market has reacted
positively to this unfortunate news, signalling that investors place a premium on a
change in leadership for the country.
Since the global economic contraction in 2009, Venezuela has managed to recover
and was projected to have recorded growth of 4.7% by year end 2012. However, there
is stil l a general gloomy outlook on Venezuela’s economy, going forward. This is partly
due to the presence of an uncertain global macroeconomic environment along with
the country’s high dependence on oil prices, which are seen by some economists to be
overly inflated relative to the balance of world demand and supply, and petroleum
exports.
Despite these negative forecasts, the Venezuelan government’s will ingness to pay its
debt in the near term is promising. The Chávez administration has never threatened to
default on its foreign currency obligations although no legislation prevents the
administration from refusing to pay the country’s debt. While the percentage of
Venezuela's debt denominated in foreign currency has fallen, it remains above 50% and
will increase if the country devalues its currency which is currently fixed at 4.30 bolivares
for 1.00 USD. Devaluation is expected to take place in early 2013 but will most l ikely be
delayed due to the uncertainty surrounding the future of the Chávez administration. The
devaluation of the currency may assist in boosting oil revenues in local currency as well
Prepared by: VMWM Research Department;
as closing the fiscal deficit. Currently, Venezuela does not face an external l iquidity
constraint given large and recurring current account surpluses and significant external
financial assets. However, this could easily become unsustainable if the government
takes on excessive debt coupled with
Venezuela: Economic Indicators
Prepared by: VMWM Research Department; January 7, 2013
Currently, Venezuela does not face an external l iquidity
constraint given large and recurring current account surpluses and significant external
this could easily become unsustainable if the government
pled with an unexpected and sharp decline in oil prices.
enezuela: Economic Indicators
There was an economic contraction
in 2009-2010 (as indicated by
negative real GDP growth rates),
which coincided with the global
economic contraction, which
caused a decline in oil prices and
consequently, oil revenue. Record
government spending in 2011 and
2012 are noted to have facilitated
positive GDP growth.
Over the review period,
unemployment rates have been fairly
stable between 7.9% and 8.6%. As
illustrated by the projected decline, it
has been noted that the Venezuelan
economy is seeking to utilize its
human resources more effectively
with the 2012 implem
social initiatives aimed at helping
match individuals with employment
opportunities and helping young
people obtain their first job.
Page 4 of 11
Currently, Venezuela does not face an external l iquidity
constraint given large and recurring current account surpluses and significant external
this could easily become unsustainable if the government
sharp decline in oil prices.
There was an economic contraction
2010 (as indicated by
negative real GDP growth rates),
which coincided with the global
economic contraction, which
caused a decline in oil prices and
consequently, oil revenue. Record
government spending in 2011 and
2012 are noted to have facilitated
positive GDP growth.
Over the review period,
unemployment rates have been fairly
stable between 7.9% and 8.6%. As
illustrated by the projected decline, it
has been noted that the Venezuelan
economy is seeking to utilize its
human resources more effectively
2012 implementation of
social initiatives aimed at helping
match individuals with employment
opportunities and helping young
people obtain their first job.
Prepared by: VMWM Research Department;
Venezuela: Economic Indicators
Prepared by: VMWM Research Department; January 7, 2013
Venezuela: Economic Indicators
Venezuela has recorded consistently
high inflation rates which may be
due to high state spending, excess
liquidity in the
fiscal mismanagement
government authorities. These high
levels of inflation erode purchasing
power and contribute
standard of living which may further
translate into a lack of overall
international competitiveness over
the medium term.
The Venezuelan government has been
consistently recording a public deficit
which may be attributed to a lack of
diversification and increased social
spending on housing, agriculture and
job creation programmes. In
conjunction with this, the continued
concessions offered to select Asian,
Latin American and Caribbean
countries on Venezuelan oil has also
reduced potential additional revenue
streams.
Public Debt includes bonds, treasury
bills and securities
government or funds borro
supranational institutions
review period, Venezuela’s public
debt has been increasing and is
projected to have
of GDP by the 2012 year end.
consistent with the government’s
successive budget deficits.
Page 5 of 11
Venezuela has recorded consistently
high inflation rates which may be
high state spending, excess
the money supply and
fiscal mismanagement by
government authorities. These high
levels of inflation erode purchasing
power and contribute to a lower
standard of living which may further
translate into a lack of overall
international competitiveness over
the medium term.
The Venezuelan government has been
consistently recording a public deficit
which may be attributed to a lack of
diversification and increased social
spending on housing, agriculture and
job creation programmes. In
conjunction with this, the continued
ssions offered to select Asian,
Latin American and Caribbean
countries on Venezuelan oil has also
reduced potential additional revenue
includes bonds, treasury
securities issued by the
or funds borrowed from
supranational institutions. Over the
review period, Venezuela’s public
debt has been increasing and is
have reached over 50%
of GDP by the 2012 year end. This is
consistent with the government’s
successive budget deficits.
Prepared by: VMWM Research Department;
Venezuela: Economic Indicators
*Estimated Figures/Forecasts
Sources: International Monetary Fund (IMF) World Economic Outlook April 2012
(CIA) World Factbook 2012.
Prepared by: VMWM Research Department; January 7, 2013
Venezuela: Economic Indicators
: International Monetary Fund (IMF) World Economic Outlook April 2012, Central Intelligence Agency
Venezuelan foreign exchange and gold
reserves have been rapidly declining
and are projected to
below the optimal level of US$26,800M
(20 weeks of goods and services
imports) by the end of 2012. On
numerous occasions
has transferred monies from the reserves
to finance opaque
the Fund for National Development
the foreign reserves continue to decline,
this puts devolutionary and inflatio
pressure on the Bolivar.
There was a significant recorded
decline in the Central Bank
benchmark interest rate
2010 and 2012
interest rates may have been
motivated by an attempt to increase
investment and consumption within
the economy. However, as a
consequence, this contributed to the
rise in the inflation rate and, in the
near term, may cause a weakening
of the national currency, which, as
noted above, is desired by the
administration.
Page 6 of 11
, Central Intelligence Agency
foreign exchange and gold
reserves have been rapidly declining
and are projected to have fallen well
below the optimal level of US$26,800M
(20 weeks of goods and services
by the end of 2012. On
numerous occasions, President Chávez
transferred monies from the reserves
opaque initiatives such as
National Development. As
the foreign reserves continue to decline,
this puts devolutionary and inflationary
pressure on the Bolivar.
There was a significant recorded
decline in the Central Bank
benchmark interest rate between
2. This reduction in
interest rates may have been
motivated by an attempt to increase
investment and consumption within
the economy. However, as a
consequence, this contributed to the
rise in the inflation rate and, in the
near term, may cause a weakening
the national currency, which, as
noted above, is desired by the
Prepared by: VMWM Research Department;
Venezuela Bonds – Historical Data
Venezuelan bond prices have been
rallied to record highs, due to the
President Chávez and the foundation of his aspiring
benchmark 2027 dollar bond, traded at its highest on December 10, 2012 to bid
with a yield of 8.863%. This is characteristic of all the
which traded at their highest around the same date.
Chávez’s ability to begin his third term as the Venezuelan president has come directly into
question after he announced his successor, Nicolas Maduro
to remain in office. This announcement was made
another surgery related to his battle with pelvic cancer. As a result of this operation there is
a possibility that he may not be well enough to return to
inauguration. The more unfavourable
the more the market responds positively to Venezuelan sovereign debt.
Prepared by: VMWM Research Department; January 7, 2013
Historical Data*
have been charting an upward trajectory and,
due to the great deal of speculation regarding the health of
and the foundation of his aspiring 21st century socialist administration
benchmark 2027 dollar bond, traded at its highest on December 10, 2012 to bid
with a yield of 8.863%. This is characteristic of all the illustrated Venezuelan sovereign
which traded at their highest around the same date.
ability to begin his third term as the Venezuelan president has come directly into
question after he announced his successor, Nicolas Maduro, in the event
announcement was made before he left for
his battle with pelvic cancer. As a result of this operation there is
a possibility that he may not be well enough to return to Venezuela for the January 10, 2013
inauguration. The more unfavourable the outcome of President Chávez
the more the market responds positively to Venezuelan sovereign debt.
Page 7 of 11
, in December 2012,
great deal of speculation regarding the health of
socialist administration. The
benchmark 2027 dollar bond, traded at its highest on December 10, 2012 to bid $103.125,
illustrated Venezuelan sovereign bonds
ability to begin his third term as the Venezuelan president has come directly into
in the event that he is unable
before he left for Cuba to undergo
his battle with pelvic cancer. As a result of this operation there is
Venezuela for the January 10, 2013
Chávez’s health becomes,
Prepared by: VMWM Research Department;
Venezuela Bonds – Historical Data
As bond prices recently rallied, these record
the market to the possibility that, Hugo
in the near future. In the event that Hugo
further speculation as elections will have to be held within 30 days after which, the market
will anticipate what policies the new administration
Prepared by: VMWM Research Department; January 7, 2013
Historical Data*
hese record low yields may be indicative of the reaction by
the market to the possibility that, Hugo Chávez may not be the leader of this oil rich country
In the event that Hugo Chávez is unable to be sworn in
as elections will have to be held within 30 days after which, the market
new administration pursues.
Page 8 of 11
may be indicative of the reaction by
may not be the leader of this oil rich country
is unable to be sworn in, there will be
as elections will have to be held within 30 days after which, the market
Prepared by: VMWM Research Department; January 7, 2013
Page 9 of 11
Venezuela Bonds – Historical Data*
As at December 2012, the cost to insure against a potential default or restructuring of
Venezuelan debt had declined significantly as the spread on Venezuelan five-year credit
default swaps have narrowed since and investors remain attracted to the fairly high yields
on Venezuelan sovereign bonds.
*Historical Data Retrieved from Bloomberg as at December 31, 2012
Prepared by: VMWM Research Department; January 7, 2013
Page 10 of 11
Venezuela Bonds: Duration Analysis
Duration is a tool used to measure the approximate percentage rate of change of bond
prices with respect to yield. This type of analysis follows the concept that interest rates and
bond prices are inversely related. Duration analysis is useful to investors in the sense that it is
a measure of risk which demonstrates the sensitivity of bond prices to a change in interest
rates.
Based on the duration calculations, for every 100 basis-point (1%) decrease in interest rates
for the 2022, 2027, 2028 and 2038 bonds it is expected that bond prices will increase by
5.59%, 7.82%, 7.93% and 10.27% respectively. In this context, it is highly likely that the
Venezuelan central bank will be further motivated to adjust interest rates downwards in
order to encourage continuous investment and consumption within the economy.
Considering the fixed-rate nature of these Venezuelan sovereign bonds, if there is a
reduction in interest rates, investors will see bond price changes reflective of the increasing
volatility associated with a longer time until maturity.
Outlook & Recommendation
In the near term, the outlook on Venezuela is very uncertain as the market responds to
Chávez’s health woes. Generally, in 2012 bond markets outperformed many forecasts and
outlooks due mainly to accommodative policy measures. For the conservative/typical
investor, it appears that they may have missed the boat with the recent rallying of
Venezuelan sovereign debt especially as there is a lessened growth in the developed-
market due to anticipated monetary policy accommodations and more liquidity provisions.
After this series of rallying, by December 17, 2012, the cost of underwriting government debt
in the event of a default went back up to reverse a portion of recent profits. Despite the
obvious political risk, based on the 2012 overall performance of emerging market debt
(13.61% in returns on a market value-weighted basis) it would appear that there is still
Prepared by: VMWM Research Department; January 7, 2013
Page 11 of 11
potential for exceptional returns (in the form of attractive yields along with capital
accumulation) within the market for bond-holders and potential investors. As it relates to the
aforementioned Venezuelan sovereign bonds, the ability of the country to generate
revenues and service their debt remains robust and, as such, for the long-term we
recommend these bonds as a BUY. However, it is clear that a diversified and balanced
portfolio is what will bring favourable returns to avid investors in this uncertain global macro-
economic climate.
Disclaimer: This Research Paper is for information purposes only. The information stated herein may reflect the opinion and views of VM Wealth Management in relation to market conditions and does not constitute any representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. Before making any investment decision, please consult a VM Wealth Management Advisor.