Cablegate: Pdvsa Bonds Postmortem

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RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #0741/01 1032100
ZNR UUUUU ZZH
R 132100Z APR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8361
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 02 CARACAS 000741

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD

E.O. 12958: N/A
TAGS: EFIN ENRG VE
SUBJECT: PDVSA BONDS POSTMORTEM

REF: CARACAS 667

1. (SBU) SUMMARY: On April 12, PDVSA issued USD 7.5 billion
worth of bonds. The issuance, an increase over the USD 5
billion originally offered, was divided between three
securities, yielding 5.25 percent, 5.3 percent and 5.5
percent, and maturing in 2017, 2027, and 2037, respectively.
The bonds were oversubscribed by as much as 300 percent, with
demand driven almost entirely by Venezuelans seeking a
guaranteed profit and access to dollars. The issuance is one
of the largest in the history of emerging market debt
issuances. END SUMMARY.

2. (SBU) PDVSA issued USD 7.5 billion in dollar-denominated
Eurobonds on April 12 via the Venezuelan Central Bank (BCV).
The issuance rose from USD 3.5 billion, discussed in early
2007, to a USD 5 billion offered on March 22 (reftel), to an
announced allocation of USD 7.5 billion on April 3. As of
the morning of April 13, the bonds were being sold in
secondary markets at 76 percent of face value. The increased
allocation was due both to high demand in Venezuela and by
PDVSA's seemingly insatiable hunger for cash. With this
issuance, PDSVA will have issued over USD 12 billion in 2007,
raising its total debt stock from USD 4 to USD 16 billion.
The proceeds (in local Venezuelan bolivars) will reportedly
be used to fund PDVSA's ambitious investment plans, though
local analyst and industry players think it more likely that
PDVSA will use this money to pay off current liabilities
stemming from the "nationalization" of the oil industry in
2006 and 2007.

3. (SBU) Santander Investment expects that the issuance will
remove around 50 percent of the excess liquidity in
Venezuela, and estimates that the USD 7.5 billion amount
represents 14 percent of Venezuela's current money supply
(M2). PDVSA has said previously that, to avoid reinjecting
money into the local economy, it would convert the bolviars
into dollars with the BCV. This would reduce the country's
foreign exchange reserves by USD 7.5 billion overnight.
Coupled with transfers of USD 2 billion in February and USD
1.7 billion in March to FONDEN, this would represent almost a
33 percent decrease in foreign reserves since the beginning
of 2007, and leave the BCV with enough money to cover only
eight months of imports (well below the stated goal of 12
months). (Note: As of April 13, the BCV had 31.4 billion in
foreign exchange reserves. End Note).

4. (SBU) In addition, even without the potential drain of USD
7.5 billion in hard currency, the BCV's liabilities already
exceed its assets. While Central Banks by definition cannot
go bankrupt, the effects of the BRV's monetary policy are
clearly beginning to show. Lower foreign reserves mean the
BCV will have fewer resources to use for its operations and
to back the CDs and notes it issues to banks locally to
absorb liquidity. The BCV is also handling the on-going
monetary conversion, which will remove three zeroes from the
bolivar. It reportedly will cost the BCV at least USD 100
million to purchase new bills and coins.

5. (SBU) The announcement on April 2 provided a table of
allocations. Requests below USD 3000 will receive the full
amount and a sliding scale for larger requests ranges from 90
percent of orders between USD 3000 and 5000 to 20 percent for
those in excess of USD 20 million (capped at USD 100
million). The bonds were reportedly oversubscribed by as
much as 300 percent (which provided one of the excuses to up
the ante). Given the caps on issuances, this offering will
not meet the demands of many of the corporations whose dollar
needs drive the parallel market rate (reftel). Following the
PDVSA bonds announcement on March 22, the parallel rate fell
from Bs. 4000/dollar to around Bs. 3500/dollar, where it has
been hovering ever since. Most financial watchers expect it
to stay in this range for the near future, barring
significant changes in approvals by the Commission for the
Administration of Foreign Exchange (CADIVI).

6. (SBU) On April 10, the BRV published an income tax
exemption for the bonds in the Official Gazette. Previously,
Ministers Cabezas and Ramirez had explained that the PDVSA
bonds would, like sovereign debt, be tax free. However,

CARACAS 00000741 002 OF 002

under Venezuelan law this was not permissible. The last
minute act made possible by Chavez' diktat powers through the
enabling law allowed the exemption, though the wording has
led to more questions. Under the language published in the
Gazette, the bonds are only tax free for five years (through
2012) and only tax free locally. Once traded on secondary
markets outside of Venezuela (as almost all will be in order
for their holders to obtain dollars), it appears that future
owners will owe taxes to the Venezuelan government, putting a
further discount on their value and further complicating an
already messy issuance.

7. (SBU) The issuance also caused a hiccup in the banking
sector, as bank liquidity was hurt when clients withdrew USD
7.5 billion to pay for the bonds on April 12. The interbank
loan rate doubled (from around 7.5 percent to over 15
percent) overnight and the BCV had to inject bolivars into
the system in order to prevent a crisis.

8. (SBU) COMMENT: The newspaper El Nacional recently
estimated that only 2.6 percent of Venezuelans had sufficient
savings to be able to afford the bond offering. Reportedly,
brokers were in the barrios (poor neighborhoods) in the week
leading up to the sale offering 500,000Bs. (or USD 232) for
national identification numbers to submit additional orders.
As was seen in the bonos del sur issuances, these lucky
purchasers will make a nice return on their two week old
investment, thanks to the gap between official and parallel
exchange rates. While the BRV and PDVSA have touted the
enormous interest in these bonds as evidence of the
Venezuelan people's support, it really is demonstrative of
their desire for dollars and to take advantage of a
guaranteed profit. END COMMENT.

BROWNFIELD

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