By Anne Friberg
NeuGroup LatAm Treasury Managers’ Peer Group sees mixed results in Venezuelan bond sale. The same tactic never works twice.
It was a mixed bag for The NeuGroup’s Latin American Treasurers’ Peer Group in Venezuela’s recent bond sale. Some were able to purchase the bonds, and some were not.
Leading up to the sale, Venezuela’s first since October 2009, there was talk of various bidding strategies. Unfortunately, despite past bond sales, old hands knew that previous experience didn’t matter—like so many other aspects of doing business in Venezuela.
Therefore, ideas on how to proceed varied, with talk of some treasurers thinking to bid high (even as much as $100mn, the thinking being that it was better to take the risk of getting nothing in order to get more) and some planning to bid within the $5mn-$10mn range.
In the end it was the low bidders who were successful.
Overall, Venezuelan government on August 16 successfully sold its $3bn of 12.75 percent bonds, due in 2022. According to news reports, the bonds were priced at par, or 100 percent of face value, with a 12.75 percent coupon, and were sold in bolivars; however, the bonds can be resold abroad for dollars. Demand was heavy at $9.2 billion, or 307 percent, according to the Venezuelan Finance Ministry.
Depending on the category
In order to participate in the sale, which was in early August, corporations and investors were advised to submit bids early and no later than August 12. Bidders were also told to bid in one of two categories—appropriately named Category 1 and Category 2—with the issue total split evenly between the two. Category 1 was for corporate importers of essential goods; category 2 was for non-essential goods importers and individuals.
The week after the bids were in, one LATMPG member noted in an email that the cutoffs for Category 1 and 2 had been $18 million and a measly $66,000, respectively (also confirmed by official results released by the finance ministry), meaning that those who bid up to those amounts got their whole bid while those who bid over it got no allocation at all.
Accordingly, Category 1 companies that bid under $18mn were successful and those that went over were not. Interestingly, we heard that one company participating in the auction had bid through three legal entities and was able to secure about $20mn. In Category 2, few (if any) companies bid successfully, given the low limit.
The Category 1 cutoff level, according to a source at BBVA in New York, was set to allow importers to pay suppliers until Christmas. That allocation, thus, went to corporates only. Category 2 was open both to individuals and corporate bidders but the low maximum amount made it unlikely that any of that $1.5 billion went to corporates.
Which banks were used?
Of the companies unofficially polled after the bond sale, most said they used BBVA while only one said it used Mercantil. Those who used BBVA said that bank’s conditions were better and that overall the bank was more involved and communicated better than their other banks. The other reason was a matter of convenience. Of the companies polled, many already have cash balances with BBVA so in their case it was easier to bid and transact via that bank (rather than transferring the cash to transact with banks that are otherwise reluctant to take deposits).
However, treasurers report that there isn’t really a general feeling that BBVA had any better or “inside” information into how to get a bigger allocation. As one treasurer said: “That’s the best kept secret in Venezuela.”
Lessons learned
Even for those who lost out there were lessons learned; although given the Chavez government’s fickleness, it’s hard to say what will happen next. But here’s what treasurers took away:
- Bid smaller next time. The bid-big strategy was a bust in this round and given the overall demand, is likely to be unsuccessful in the future as well, thought disappointed bidders.
- Have more LEs. Since one company we know of was able to secure a larger amount in its bid by spreading it out over three legal entities, companies will consider establishing more legal entities, or alternatively activating bank accounts (necessary for the bond transactions) with legal entities lacking them. Members noted that a legal entity has to have been established for at least six months before it can participate in any bond deals.
- Beware of other “legal” alternatives. One practitioner said one of his company’s law firms had deemed legal a scheme similar to the parallel market but it sounded more like a privately brokered exchange between buyers and sellers of bolivars. Legal or not, due to a lack of counterparties, the rate would likely be very expensive (9VEF/USD was mentioned vs. the all-in rate of 5.40 realized by a successful bidder in the latest bond swap) and several treasury pros with Venezuela experience noted the risk of being seen as circumventing the rules and getting shut out of the legal avenues like CADIVI and ALADI.
Further Developments
While the bond auction captured most of treasury’s attention with regard to Venezuela, the next question is what Chavez will do to fix the parallel currency market that he effectively shut down in May.
The replacement SITME system set up in June just does not allow sufficient transaction amounts for multinationals to convert enough bolivars to meet their needs.
REPLACING SITME?
Aware of this, the Venezuelan Central Bank President, Nelson Merentes, all but acknowledged that SITME was unsustainable when he reportedly said at the end of July that the former swap market would be restored in October.
Amid talk of restoring the former swap market, there are also reports that Venezuela will create a new public securities market (Bolsa Pública de Valores) fed with new public-sector debt issues. This comes as part of a new Venezuelan Securities Market Law. While issues on the exchange will be in bolivars, eventually they could be used to access dollars in swap transactions.
We’ll Get ‘em Next Time
LATMPG members, whether or not they bid—successfully or otherwise—in the August sale will likely get another chance before 2010 is out.
The latest sale was part of Venezuela’s $10.5 billion debt plan for 2010, and, according to Finance Minister Jorge Giordani, the government will continue to sell debt in the remaining months of the year, although no currency was specified. The October 2009 bond sale was a $5bn dollar-denominated sovereign issue and was intended to boost a weak bolivar and provide cash to importers.