Bloomberg News

Venezuelan Bonds Soar on Chavez Cancer Recurrence: Andes Credit

December 10, 2012

Venezuela's President Chavez

Hugo Chavez, Venezuela's president. Photographer: Chris Ratcliffe/Bloomberg

Venezuelan bonds surged, sending benchmark yields to a five-year low, as speculation mounted that President Hugo Chavez will be unable to complete his third term after he acknowledged a recurrence of his cancer.

The yield on the government’s dollar bonds due 2027 plunged 46 basis points, or 0.46 percentage point, to 8.91 percent at 3:04 p.m. in New York as traders anticipated a new administration taking office and courting the investment Chavez drove away. The bond’s price jumped 3.68 cents to 102.78 cents on the dollar, according to data compiled by Bloomberg.

Chavez traveled to Cuba for more surgery today after urging Venezuelans to vote for Vice President Nicolas Maduro if he is unable to remain in office, marking the first time he’s indicated who he wants to succeed him since falling ill in June 2011. Speculation his health was deteriorating following his re- election mounted after he spent 12 days in Cuba as part of a 21- day absence from public view that ended Dec. 7.

“This is different because Chavez has never addressed his successor before,” Kathryn Rooney Vera, a strategist at Bulltick Capital Markets in Miami, said in a telephone interview today. “This is a de facto admission of near term incapacitation. That he specifically mentioned a chance he might not be at inauguration day, that told the market this guy isn’t going to be around for his six-year term.”

Currency Controls

Today’s gains add to a two-week rally that left Venezuelan bonds up 44.7 percent this year, the second-biggest return in emerging markets after the Ivory Coast. In his 14 years in office, Chavez has seized more than 1,000 companies and imposed currency and price controls as part of what he says is a push to turn South America’s biggest oil producer into a socialist country. Those moves left Venezuela’s yield premium to U.S. Treasuries over 1,000 basis points as recently as Oct. 10, according to JPMorgan Chase & Co.’s EMBI Global index.

“There is a clear correlation between the price of Venezuela’s debt and Chavez’s health,” Jorge Piedrahita, chief executive officer at Torino Capital LLC, said in a telephone interview on Dec. 6. “The market believes that a post-Chavez Venezuela will not be socialist.”

Five-year credit-default swaps insuring Venezuelan bonds against non-payment fell 40 basis points today to 608 basis points, the lowest level since September 2008. The contracts pay the buyer face value in exchange for the underlying securities or cash. Falling prices signal improving investor perceptions of a borrower’s creditworthiness.

October Vote

The five-year contracts may rally further, driving the cost down to about 500 basis points, according to Nomura Securities Co. and Jefferies Group Inc.

“We’ve already had impressive gains to date and I think once five-year credit-default swaps reach around 500 basis points then investors will look to start to take profits,” Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group Inc., said in an e-mailed response to questions.

Chavez defeated opposition candidate Henrique Capriles Radonski in October’s vote by more than 10 percentage points, winning a third six-year term.

Prior to the vote, Chavez told Venezuelans he was “totally free” of cancer following three operations and six prior trips to Cuba this year for treatment. Chavez, who has never said what kind of cancer he has, is due to be inaugurated to his third term on Jan. 10.

Gubernatorial Elections

“We finished radiation treatment in May, several days before I registered as a candidate for the elections,” Chavez said on Dec. 8. “If they had found anything negative, you can be sure that I would not have stood for re-election.”

Venezuela’s opposition had called for the government to provide more information about Chavez’s health.

“I hope there is profound reflection in our country about the need to speak the truth,” Capriles, who will stand for re- election as governor of Miranda state this month, said yesterday in comments carried on the Globovision television network. “Venezuela does not have succession. This is not Cuba nor is it a monarchy that has a king. Here in Venezuela, when someone leaves a position, the people get the last word.”

National Assembly President Diosdado Cabello, who spoke on state television on Dec. 8, said that the South American country’s military supported Chavez and that the opposition shouldn’t try to take advantage of Chavez’s health concerns. He said Chavez’s cancer won’t disrupt gubernatorial elections set for Dec. 16.

Bolivia, Mongolia

“Even the opposition should be praying that Chavez gets better,” Cabello said. “He is the guarantee of peace in the country.”

The extra yield, or spread, investors demand to hold Venezuelan government dollar bonds instead of U.S. Treasuries dropped 56 basis points to 7.58 percentage points today, according to JPMorgan’s EMBI Global index. Investors demanded an extra yield of 8.29 percentage points to hold Ecuadorean debt and 10.33 percentage points to hold Argentine notes today.

Venezuela is a more attractive investment than Bolivia, which sold bonds at 4.9 percent in October, and Mongolia, which last month sold $1.5 billion of bonds in two tranches at yields of 4.1 percent and 5.1 percent, Russ Dallen, the head bond trader at Caracas Capital Markets, said in an interview.

“Venezuela is actually a much better story than any of those countries because of the oil exports at $100 a barrel,” he said.

Bolivar’s Plunge

The country has the world’s largest reserves of oil, totaling about 300 billion barrels, according to the BP Statistical Review of World Energy, and currently produces about 2.8 million barrels a day. Oil traded above $86 a barrel today in New York and has averaged more than $90 this year.

Speculation Chavez would devalue the bolivar after his re- election helped spur a 46 percent plunge in the currency in unregulated trading this year to 16.01 per dollar, according to Lechuga Verde, a website that tracks the rate. Venezuelans use the black market when they can’t get access to dollars at the official exchange rates of 4.3 and 5.3 per dollar.

“Currency controls have worked very well,” Maduro said today on state television. “Of course they could be improved, and they will.”

Chavez’s return to Cuba could delay the devaluation, said Bret Rosen, a Latin America strategist at Standard Chartered Bank.

“With Chavez out of the country indefinitely, and his health a major worry, we doubt any major economic decisions will be taken in the near term,” he wrote in a note to clients yesterday. “The timing of a devaluation is likely to be on hold.”

Chavismo’s Options

Under Venezuelan law, if Chavez is too ill to carry out his duties, the vice president would take over until the beginning of a new presidential term Jan. 10. If Chavez is unable to attend the inauguration scheduled on that date, the National Assembly president would assume power while elections are arranged within 30 days. If he does take office and then becomes too ill within the first four years, the vice president takes over the presidency for 30 days while elections are held.

While “Chavismo,” the political movement led by Chavez, will seek to stay in power should he not be able to complete his new term, his party’s economic policy may be more pragmatic, according to Torino Capital’s Piedrahita.

“The market is going to take it that things are serious and the time of Chavez leading Venezuela may actually be coming to an end,” Ray Zucaro, who helps manage about $240 million of emerging-market debt at SW Asset Management LLC in Newport Beach, California, said in a telephone interview yesterday. “The market’s reaction will be that anything is better than the current status-quo.”

To contact the reporters on this story: Nathan Crooks in Caracas at ncrooks@bloomberg.net; Corina Pons in Caracas at crpons@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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