Venezuelan debt marked lower after Chavez election win

NEW YORK Mon Oct 8, 2012 10:15am EDT

NEW YORK Oct 8 (Reuters) - Investors marked Venezuelan sovereign debt prices lower on Monday in a muted reaction to the convincing victory of President Hugo Chavez and the extension of his self-styled socialist revolution.

A bond market holiday in the United States limited the transactions for the OPEC nation's U.S. dollar-denominated debt and made any price movements more exaggerated.

The Venezuelan Global 2022, with a hefty 12.75 percent coupon, was bid down over 4 points to 102.829 versus an ask price of 107.882, according to Thomson Reuters data. The yield is currently quoted at 12.211 percent.

"The bonds are being marked down but because of the holiday in New York it is not clear what happens. We probably open weaker on Tuesday," said Paul DeNoon, a veteran emerging markets fixed income analyst at AllianceBernstein in New York.

While opposition candidate Henrique Capriles lost by 9 percentage points, a wider margin than polls suggested, it was a strong showing compared to the 25 percentage point win by Chavez in 2006. The slimmer margin of victory reflects growing frustration at his failure to fix problems such as crime, blackouts, and corruption.

DeNoon said Venezuela likely needs to come to the market and issue another bond before year end, estimating a $2 billion to $3 billion issue size to help pay for foreign exchange operations.

Venezuela uses the bonds, in part, to supply an exchange system known as Sitme to give importers access to dollars. It is a secondary mechanism to the principal exchange control agency that Chavez opened in 2003 to limit capital flight.

"(Chavez) spent a lot of money to import goods to provide them cheaply in the run up to the election and the question is will he be able to pull back? I'm not sure he has enough reserves or money to continue that strategy going forward," said DeNoon.

Chavez's 14 years of government policies advocating heavy social spending, funded by its oil wealth, and expropriation of assets across a wide spectrum of the economy are not expected to change in the next six years of his new term.

Credit default swap spreads, which track how much investors are willing to pay for insuring against a Venezuelan default or credit restructuring, increased to 781 basis points from 773 on Friday, according to Markit, the financial information services company.

That means the cost for an investor to insure $10 million worth of sovereign credit is $781,000 a year for five years. A year ago the cost was close to 1,200 basis points.

Ahead of the election, Venezuelan bond prices rose and the cost for insuring credits fell as Capriles, the candidate who united the political opposition, showed improving poll numbers up to the vote, making predictions for a close race.

Bond prices did come down just before the election, analysts noted, as investors booked some profits betting the consensus view of a Chavez victory would come to fruition.

The results may be creating a knee-jerk sell-off in some Venezuelan credits, but as one analyst surmised, Venezuela still offers yield-hungry investors the best option in a low yielding global environment.

"Chavez has always paid the debt. For all the bad things you can say about him, he has always done that. While oil prices remain high Venezuela has the ability to pay. The calculus is in favor of them to pay," said Russ Dallen, managing partner at Caracas Capital Markets, an investment bank in Venezuela.

"Today, bonds may be down, but ultimately as bond yields around the world get incredibly low as (U.S. Federal Reserve Chairman Ben) Bernanke & Co gives the money away for free, Venezuela has the money and is going to attract that cash," Dallen said.

U.S. monetary policy, which has kept the Federal Reserve benchmark interest rate near zero for nearly four years, is expected to remain unchanged through mid-2015.

In anticipation of Tuesday's trading, when the full market returns to their desks, prices were bid higher for state-run oil company Petroleos de Venezuela's (PDVSA) 2022 U.S.-dollar denominated bond. The issue, with a rich 12.75 percent coupon, were bid up 1.03 points to 101.9942, yielding 12.376 percent, according to Thomson Reuters data.

Chavez's victory was extraordinary for a leader who just a few months ago feared for his life as he struggled to recover from cancer.

"The consensus view has always been that the "regime change" would more likely occur through an eventual sudden event as opposed to the programmed election event," wrote Siobhan Morden, Latin America analyst at Jefferies & Co in New York.

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