Venezuela’s Jumbo 20-Yr Fails to Surprise

The announcement Tuesday that Venezuela plans to issue $4.2bn in RegS only 11.95% 2031s hardly came as a surprise after rumors of such a deal had already sent secondary levels south. Indeed, many of the details circulated over the last week proved to be true, with the only slight exceptions such as talk of a 12% coupon. As is standard practice for such deals, the sovereign has set the price beforehand, in this case par, and will leave the books open to allow locals to buy at an FX rate of VEB4.30/1USD. Grey market levels of 81.50-82.50 were already being quoted yesterday as foreign accounts calculated what would be fair value on the bonds once they were free to trade in the international market after a 42 day seasoning period. At 82.50, the amortizer would offer a yield of around 14.37%, according to one investor. “All this will be sold through the Sitme (the state-run FX platform) at VEB5.30/1USD, which implies a slightly lower secondary price [than 81.50-82.50],” says RBS strategist Siobhan Morden. “Irrespective it is cheap versus the curve.” For instance, Venezuelan benchmark 2027s were trading Tuesday afternoon at 74.25, or at a lower 13.125%-13.05% yield, even after selling off in the wake of supply fears. With a $4.2bn size, the new 2031s will become a new benchmark for investors and will provide an attractive instrument to take a view on regime change as the 2012 presidential elections approached, Morden adds. If nothing else the11.95% coupon offers alluring carry. Indeed the deal is expected to go well. As one London-based investor points out, appetite for Venezuela debt remains robust in the context of new inflows to EM bond funds and the resilience of high yield EM debt. The B2/BB-/B plus bond is governed by New York law and will be registered in Luxembourg. The RegS bond will amortize equally on August 5, 2029, 2030, and 2031. Deutsche Bank was mandated as lead, but perhaps more interestingly the government has also selected Russia’s Evorfinance Mosnarban