RPT-Venezuelan bonds fall on Chavez win but his frailty limits drop

Tue Oct 9, 2012 3:09pm EDT

* Venezuela bonds had risen on hopes opposition would win

* Chavez had slimmer margin of victory than in 2006

* Many investors expect another election in a year or two

By Daniel Bases

NEW YORK, Oct 9 (Reuters) - Venezuelan sovereign debt prices fell on Tuesday after socialist President Hugo Chavez won reelection, but the drop was limited because investors doubt he is healthy enough to serve a full six-year term.

Investors betting on a victory for united opposition candidate Henrique Capriles had fueled a rise in Venezuelan debt ahead of the election. But Chavez's convincing victory by more than 9 percentage points will allow him to continue his self-styled socialist revolution.

Even so, Chavez has undergone three operations in Havana since June 2011 for an undisclosed cancer in the pelvic region. His illness was serious enough to curtail his campaigning in the final weeks, and he has not groomed a potential successor.

"The market is expecting over the next one to two years another presidential election," said Kathryn Rooney Vera, macroeconomic strategist at BullTick Capital Markets in Miami, referring to the possibility Chavez leaves office early.

Chavez has used revenue generated during Venezuela's 10-year oil boom to support heavy spending on social programs while also expropriating private businesses.

If Chavez dies or is declared incapacitated within the first three years of his new term, Venezuela must hold a snap election within 30 days. If he leaves office after four years, the constitution states the vice president will take over for the remainder of the term.

While Capriles lost by 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 unresolved problems such as crime, blackouts, and corruption.

The U.S. Columbus Day holiday on Monday limited trading in Venezuela's U.S. dollar-denominated debt, leading to some pent-up selling pressure. But prices rebounded off session lows.

"There definitely has been a sell-off reaction, but I think you would have seen a more precipitous collapse if it were not for Chavez's health condition," said Rooney Vera.

Venezuela's oil wealth allows the government to keep paying the debts that help fund its socialist agenda. So the country's debt, which offers yields exceeding 12 percent, is attractive to many investors at a time when benchmark 10-year U.S. Treasuries are not even offering 2 percent.

According to traders, Venezuela's 2027 Global bond fell roughly 3.5 points in price to bid around 87 with a yield just under 11 percent. The 2022 Global bond dropped about 4 points to a bid of 102.5 with a yield of 12.16 percent.

Overall the Venezuelan credit curve lost about 3.7 percent in value on the day, having been up year-to-date on a total return basis by about 30 percent.

Viewed in aggregate on the JPMorgan Emerging Markets Bond Index Plus, Venezuelan credit widened by 48 basis points to 952 basis points over comparable U.S. Treasuries.

WILD CARD

Investors and analysts pointed to the health of Chavez as the wild card in Venezuela. While his reelection preserved the status quo, investors were encouraged by the cohesiveness of the opposition.

"That's a positive sign and means there is an organized entity to can step in. Political transition always tends to be messy and frankly if Capriles had won it would have been even messier because it is unlikely Chavez would have gone quietly," said AJ Mediratta, senior managing director at Greylock Capital Management in New York.

Opposition party candidates will face another test of their cohesiveness in December's gubernatorial elections, which could mean election-style spending and muted policy announcements persist for the next two months.

Ahead of the president election, Venezuelan debt rose and the cost of insuring against default dropped as Capriles made progress in closing the gap. Some observers believed Chavez could lose at the ballot box after 14 years in power.

Mediratta said the firm had lightened up its holdings of Venezuelan bonds before the election, but is finding it hard to buy back after the fact.

"It says there is not much follow through on the selling, meaning the outcome is not that surprising," Mediratta said.

Still, the protection offered by credit default swaps became more expensive in a knee-jerk reaction to the Chavez win.

Credit default swap spreads, which track how much investors are willing to pay for insuring against a Venezuelan default or credit restructuring, increased to 848 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 $848,000 a year for five years. A year ago the cost was close to 1,200 basis points.

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