If you are looking for a high yield in emerging markets, you need to look in Latin America. And if you look at LATAM, your choice is really between Venezuela and Argentina. Ecuador is a distant third but was just able to float $2mm in debt at well below ten percent, and the bonds have tightened further even though they defaulted before in 2008. With the United States blocking the release of a bond payment due shortly, Argentina has been seeing fifteen point price swings as the status of the payment changes back and forth. The U.S. courts are forcing the Argentine government to pay investors in the last default before they pay holders of their restructured debt. So among the LATAM high beta names, Vene has been trading up as Argie has been trending down over default fears.
Russ Dallen of Caracas Capital Markets says: “Venezuela has more oil than Saudi Arabia but barely is able to produce three million barrels a day versus eleven million for Saudi. Would you loan Saudi Arabia money at twelve percent? Of course. The question is event risk. Will there be a coup? Will there be regime change? And if so, which side will take over? The good guys or the bad guys? The PDVSA 2022s are trading at a twelve percent yield for eight years with a twelve and three quarters coupon. So your cash flow is huge.” PDVSA is the Venezuelan state-owned oil company, and its bonds are treated as sovereign risk.
Nicolas Maduro, who took over the country after the death of Chavez, has been feeling somewhat stronger after the end of the recent street protests. However, he knows he could be in trouble if he doesn’t make positive economic changes for the people. He has therefore been open to more non-socialist or even capitalist economic concepts.
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Chavista Jorge Giordani has been removed from the board of the Venezuelan Central Bank and replaced by a former military officer, Marco Torres. Maduro has been making slow changes that have investors optimistic about further rational economic moves to stabilize the currency and reign in inflation. He has also announced further cabinet changes to be disclosed over the next couple weeks. The head of PDVSA, Rafael Ramirez, also controls the mining sector in the country and could be looking at a power sharing arrangement with Maduro, along with others.
In March of this year, Maduro announced a new free-floating currency regime to reduce the appeal on the black market for dollars and to allow business easier access to U.S. currency. Financial markets cheered the action, and Venezuelan bonds rallied. However, they are still cheaper than Ukraine and other hot-spots with as much or more event risk. The bottom-line is, for those willing to get on the roller-coaster that is Venezuelan debt, there is money to be made in even short term paper.
Photo credit: Joka Madruga (Flickr)
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