Estupendo Venezuela!

Lovin’ Venezuela right now!

BNN’s Kim Parlee has teased me on and off for months about my two Venezuelan bond holdings. I imagine her concern was that there would always be an event, just around the corner, that would upset the applecart: another revolution, Chavez passing, the 2011 Arab Spring reaching the shores of South America….

It was the Egyptian revolt that presented the buying opportunity in the first place (hat tip TS). Folks moved their money to less risky assets, and countries like Venezuela saw their borrowing costs increase as a result. At the time, U.S. corporate high yield bonds were still being printed in the 8.50-10.50% range. I’m always at least half in banks, rail and pipes (beyond our own Fund III) but the idea of putting a small amount of risk capital into the State of Venezuela and its oil company, Petroleos, didn’t seem crazy at the time. Even last February.

There were two bonds in question. A 12.75% amortizing bond issued by the Venezuelan Republic itself, which was due in 2022. The interest is paid in U.S. dollars, so one doesn’t have to worry, per se, about currency moves. It was trading at 83.50, and the implied yield was 15.3%, almost double what some unrated / unsecured / no covenant high yield notes were offering this time last year.

The other note was issued by the State oil company Petroleos, yielding 4.9% (also U.S. pay) and due in October 2014. It could be had for 68 back then, implying a yield of 7.2%; not bad for 3 year oil-backed South American paper when AAA oil-backed Canada was delivering less than 1%. Why the notional “rating” of the State and the State-backed Oil company appears different is beyond me, but there is little doubt that a 2022 note is more risky than one due in 2014. At the same time, if you were comfortable with 3 years of country-risk in Venezuela, why not go for some incremental yield? If things went off the rails over that 36 month period, it didn’t matter that your note was about to come due if Petroleos was nationalized in the meantime.

The Decade of Daddy Fund even got in on the action, with 5% positions in each issue.

By October, the State of Venezuela was trading at 80 cents. A paper loss, mitigated by the interest that was flowing in. A few months later, with a more healthy sovereign debt situation in Europe, these bonds are on fire.

The Venezuelan State bond is quoted at 106 this morning (from 83.50), while the Petroleos 2014 note is up to 88.75 (from 68). Plus the 12 months of interest received so far.

Happy times indeed. And you didn’t even have to wait to get paid!

MRM
(disclosure – this post, like all blogs, is an Opinion piece and not a recommendation to buy or sell securities)