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Prepared by: VMWM Research Department; January 7, 2013 Page 1 of 11 Venezuela: Summary Bond Terms Venezuela Bonds 12.75%, 2022 9.25%, 2027 9.25%, 2028 7%, 2038 Issuer Bolivarian Republic of Venezuela Currency USD Issue Date August 23, 2010 September 18, 1997 May 7, 2008 November 15, 2007 Tenor at Issue 12 Years 30 Years 20 Years 31 Years Time Remaining Till Maturity 10 Years 15 Years 16 Years 26 Years Duration 5.59 7.82 7.93 10.27 Maturity Date August 23, 2022 September 15, 2027 May 7, 2028 March 31, 2038 Maturity Type Sinkable Bullet Bullet Bullet Coupon 12.75% p.a semi-annual (February & August) 9.25% p.a. semi-annual (March & September) 9.25% p.a semi-annual (May & November) 7% p.a semi-annual (March & September) Day Count Basis 30/360 30/360 30/360 30/360 Bond Rating B2 (Moodys; Dec 2012), B+ (S&P; Dec 2012), B+ (Fitch; Dec 2012) B2 (Moodys; Dec 2012), B+ (S&P; Dec 2012), B+ (Fitch; Dec 2012) B2 (Moodys; Dec 2012), B+ (S&P; Dec 2012), B+ (Fitch; Dec 2012) B2 (Moodys; Dec 2012) Issuer Rating B2 (Moodys; Dec 2012), B+ Neg (Fitch; Dec 2012) B2 (Moodys; Dec 2012), B+ Neg (Fitch; Dec 2012) B2 (Moodys; Dec 2012), B+ Neg (Fitch; Dec 2012) B2 (Moodys; Dec 2012), B+ Neg (Fitch; Dec 2012) Use of Proceeds General Corporate Purpose Repay / Refinance Debt Repay / Refinance Debt Repay / Refinance Debt Governing Law New York New York New York N/A Recommendation Buy Buy Buy Buy
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  • Prepared by: VMWM Research Department; January 7, 2013

    Page 1 of 11

    Venezuela: Summary Bond Terms

    Venezuela Bonds 12.75%, 2022 9.25%, 2027 9.25%, 2028 7%, 2038

    Issuer Bolivarian Republic of Venezuela

    Currency USD

    Issue Date August 23, 2010 September 18, 1997 May 7, 2008 November 15, 2007

    Tenor at Issue 12 Years 30 Years 20 Years 31 Years

    Time Remaining Till

    Maturity

    10 Years 15 Years 16 Years 26 Years

    Duration 5.59 7.82 7.93 10.27

    Maturity Date August 23, 2022 September 15, 2027 May 7, 2028 March 31, 2038

    Maturity Type Sinkable Bullet Bullet Bullet

    Coupon 12.75% p.a semi-annual

    (February & August)

    9.25% p.a. semi-annual

    (March & September)

    9.25% p.a semi-annual

    (May & November)

    7% p.a semi-annual

    (March & September)

    Day Count Basis 30/360 30/360 30/360 30/360

    Bond Rating B2 (Moodys; Dec 2012), B+

    (S&P; Dec 2012), B+ (Fitch; Dec

    2012)

    B2 (Moodys; Dec 2012), B+

    (S&P; Dec 2012), B+ (Fitch;

    Dec 2012)

    B2 (Moodys; Dec 2012), B+

    (S&P; Dec 2012), B+ (Fitch; Dec

    2012)

    B2 (Moodys; Dec 2012)

    Issuer Rating B2 (Moodys; Dec 2012), B+ Neg

    (Fitch; Dec 2012)

    B2 (Moodys; Dec 2012), B+

    Neg (Fitch; Dec 2012)

    B2 (Moodys; Dec 2012), B+ Neg

    (Fitch; Dec 2012)

    B2 (Moodys; Dec 2012), B+

    Neg (Fitch; Dec 2012)

    Use of Proceeds General Corporate Purpose Repay / Refinance Debt Repay / Refinance Debt Repay / Refinance Debt

    Governing Law New York New York New York N/A

    Recommendation Buy Buy Buy Buy

  • Prepared by: VMWM Research Department; January 7, 2013

    Page 2 of 11

    Venezuela Bonds - Analysis

    Country Overview

    The Bolivarian Republic of Venezuela is characterized by its overdependence on the

    petroleum industry (accounts for approximately 95% of export earnings; 2.5 mill ion

    barrels per day and roughly 30% of GDP) and high sensitivity to exogenous shocks.

    Along with vast petroleum resources, the country also owns natural supplies of iron ore,

    hydroelectric power and diamonds. However, the country’s economic and political

    fortunes are closely intertwined with the fate of its president, Hugo Chávez, who enjoys

    54% of the popular vote and recently won re-election to begin his third term, extending

    his rule of 13 years for another 6 years. Currently, Venezuela faces a series of challenges

    which come in the form of a weakening of democratic institutions through the break

    down in human rights and basic freedoms, divergence of political interests and drug-

    related violence. This means that the current administration is pursuing strategies

    contradictory to any democratic movement. Instead of equality and social justice, the

    administration stifles the human rights of citizens and engages in blatant political

    discrimination with the utmost disregard for the rule of law. In conjunction with this,

    President Chávez has sought to further increase government intervention in the

    economy through the continued nationalization of firms in select industries as he

    pursues a form of 21s t century socialism. Chávez is known to popularly util ise the

    country’s oil wealth to roll out numerous social programmes catered towards the less

    fortunate while simultaneously exercising vast political control over most economic

    sectors and their operations. It is with this in mind that one must be cognizant of the

    instability and uncertainty within Venezuela and the wider region that will occur if he is

    incapable of holding his position as President and leader of the United Socialist Party of

    Venezuela.

    President Chávez is now 58 and has a history of fighting cancer. Although he had

    announced in July 2012 that he was free of all cancer cells, he was re-admitted to

    hospital in mid-December with a recurring type of pelvic cancer. This is his fourth surgery

  • Prepared by: VMWM Research Department; January 7, 2013

    Page 3 of 11

    since June 2011. At this time it is unclear whether he will be able to retain his office,

    which has given rise to uncertainty as to the political fate of the country. Immediately

    before leaving for Cuba, Chávez announced his successor Nicolas Maduro to carry on

    the work of his socialist party. Maduro is currently the Vice President as well as the

    Minister of Foreign Affairs and has been previously widely ridiculed for his former

    occupation as a bus driver. Overshadowing this is the praise he has received for his

    easy-going and affable nature while being deemed as a faithful ambassador of

    Chávez’s views. Nicolas Maduro is highly respected among President Chávez’s inner

    circle and is described as the most capable administrator and politician to carry on his

    work. In the event that Chávez is unable to return to Venezuela in time for the

    scheduled January 10, 2013 inauguration, elections may have to be held within 30 days

    unless the constitution is amended to state otherwise. The bond market has reacted

    positively to this unfortunate news, signalling that investors place a premium on a

    change in leadership for the country.

    Since the global economic contraction in 2009, Venezuela has managed to recover

    and was projected to have recorded growth of 4.7% by year end 2012. However, there

    is stil l a general gloomy outlook on Venezuela’s economy, going forward. This is partly

    due to the presence of an uncertain global macroeconomic environment along with

    the country’s high dependence on oil prices, which are seen by some economists to be

    overly inflated relative to the balance of world demand and supply, and petroleum

    exports.

    Despite these negative forecasts, the Venezuelan government’s will ingness to pay its

    debt in the near term is promising. The Chávez administration has never threatened to

    default on its foreign currency obligations although no legislation prevents the

    administration from refusing to pay the country’s debt. While the percentage of

    Venezuela's debt denominated in foreign currency has fallen, it remains above 50% and

    will increase if the country devalues its currency which is currently fixed at 4.30 bolivares

    for 1.00 USD. Devaluation is expected to take place in early 2013 but will most l ikely be

    delayed due to the uncertainty surrounding the future of the Chávez administration. The

    devaluation of the currency may assist in boosting oil revenues in local currency as well

  • Prepared by: VMWM Research Department;

    as closing the fiscal deficit. Currently, Venezuela does not face an external l iquidity

    constraint given large and recurring current account surpluses and significant external

    financial assets. However, this could easily become unsustainable if the government

    takes on excessive debt coupled with

    Venezuela: Economic Indicators

    Prepared by: VMWM Research Department; January 7, 2013

    Currently, Venezuela does not face an external l iquidity

    constraint given large and recurring current account surpluses and significant external

    this could easily become unsustainable if the government

    pled with an unexpected and sharp decline in oil prices.

    enezuela: Economic Indicators

    There was an economic contraction

    in 2009-2010 (as indicated by

    negative real GDP growth rates),

    which coincided with the global

    economic contraction, which

    caused a decline in oil prices and

    consequently, oil revenue. Record

    government spending in 2011 and

    2012 are noted to have facilitated

    positive GDP growth.

    Over the review period,

    unemployment rates have been fairly

    stable between 7.9% and 8.6%. As

    illustrated by the projected decline, it

    has been noted that the Venezuelan

    economy is seeking to utilize its

    human resources more effectively

    with the 2012 implem

    social initiatives aimed at helping

    match individuals with employment

    opportunities and helping young

    people obtain their first job.

    Page 4 of 11

    Currently, Venezuela does not face an external l iquidity

    constraint given large and recurring current account surpluses and significant external

    this could easily become unsustainable if the government

    sharp decline in oil prices.

    There was an economic contraction

    2010 (as indicated by

    negative real GDP growth rates),

    which coincided with the global

    economic contraction, which

    caused a decline in oil prices and

    consequently, oil revenue. Record

    government spending in 2011 and

    2012 are noted to have facilitated

    positive GDP growth.

    Over the review period,

    unemployment rates have been fairly

    stable between 7.9% and 8.6%. As

    illustrated by the projected decline, it

    has been noted that the Venezuelan

    economy is seeking to utilize its

    human resources more effectively

    2012 implementation of

    social initiatives aimed at helping

    match individuals with employment

    opportunities and helping young

    people obtain their first job.

  • Prepared by: VMWM Research Department;

    Venezuela: Economic Indicators

    Prepared by: VMWM Research Department; January 7, 2013

    Venezuela: Economic Indicators

    Venezuela has recorded consistently

    high inflation rates which may be

    due to high state spending, excess

    liquidity in the

    fiscal mismanagement

    government authorities. These high

    levels of inflation erode purchasing

    power and contribute

    standard of living which may further

    translate into a lack of overall

    international competitiveness over

    the medium term.

    The Venezuelan government has been

    consistently recording a public deficit

    which may be attributed to a lack of

    diversification and increased social

    spending on housing, agriculture and

    job creation programmes. In

    conjunction with this, the continued

    concessions offered to select Asian,

    Latin American and Caribbean

    countries on Venezuelan oil has also

    reduced potential additional revenue

    streams.

    Public Debt includes bonds, treasury

    bills and securities

    government or funds borro

    supranational institutions

    review period, Venezuela’s public

    debt has been increasing and is

    projected to have

    of GDP by the 2012 year end.

    consistent with the government’s

    successive budget deficits.

    Page 5 of 11

    Venezuela has recorded consistently

    high inflation rates which may be

    high state spending, excess

    the money supply and

    fiscal mismanagement by

    government authorities. These high

    levels of inflation erode purchasing

    power and contribute to a lower

    standard of living which may further

    translate into a lack of overall

    international competitiveness over

    the medium term.

    The Venezuelan government has been

    consistently recording a public deficit

    which may be attributed to a lack of

    diversification and increased social

    spending on housing, agriculture and

    job creation programmes. In

    conjunction with this, the continued

    ssions offered to select Asian,

    Latin American and Caribbean

    countries on Venezuelan oil has also

    reduced potential additional revenue

    includes bonds, treasury

    securities issued by the

    or funds borrowed from

    supranational institutions. Over the

    review period, Venezuela’s public

    debt has been increasing and is

    have reached over 50%

    of GDP by the 2012 year end. This is

    consistent with the government’s

    successive budget deficits.

  • Prepared by: VMWM Research Department;

    Venezuela: Economic Indicators

    *Estimated Figures/Forecasts

    Sources: International Monetary Fund (IMF) World Economic Outlook April 2012

    (CIA) World Factbook 2012.

    Prepared by: VMWM Research Department; January 7, 2013

    Venezuela: Economic Indicators

    : International Monetary Fund (IMF) World Economic Outlook April 2012, Central Intelligence Agency

    Venezuelan foreign exchange and gold

    reserves have been rapidly declining

    and are projected to

    below the optimal level of US$26,800M

    (20 weeks of goods and services

    imports) by the end of 2012. On

    numerous occasions

    has transferred monies from the reserves

    to finance opaque

    the Fund for National Development

    the foreign reserves continue to decline,

    this puts devolutionary and inflatio

    pressure on the Bolivar.

    There was a significant recorded

    decline in the Central Bank

    benchmark interest rate

    2010 and 2012

    interest rates may have been

    motivated by an attempt to increase

    investment and consumption within

    the economy. However, as a

    consequence, this contributed to the

    rise in the inflation rate and, in the

    near term, may cause a weakening

    of the national currency, which, as

    noted above, is desired by the

    administration.

    Page 6 of 11

    , Central Intelligence Agency

    foreign exchange and gold

    reserves have been rapidly declining

    and are projected to have fallen well

    below the optimal level of US$26,800M

    (20 weeks of goods and services

    by the end of 2012. On

    numerous occasions, President Chávez

    transferred monies from the reserves

    opaque initiatives such as

    National Development. As

    the foreign reserves continue to decline,

    this puts devolutionary and inflationary

    pressure on the Bolivar.

    There was a significant recorded

    decline in the Central Bank

    benchmark interest rate between

    2. This reduction in

    interest rates may have been

    motivated by an attempt to increase

    investment and consumption within

    the economy. However, as a

    consequence, this contributed to the

    rise in the inflation rate and, in the

    near term, may cause a weakening

    the national currency, which, as

    noted above, is desired by the

  • Prepared by: VMWM Research Department;

    Venezuela Bonds – Historical Data

    Venezuelan bond prices have been

    rallied to record highs, due to the

    President Chávez and the foundation of his aspiring

    benchmark 2027 dollar bond, traded at its highest on December 10, 2012 to bid

    with a yield of 8.863%. This is characteristic of all the

    which traded at their highest around the same date.

    Chávez’s ability to begin his third term as the Venezuelan president has come directly into

    question after he announced his successor, Nicolas Maduro

    to remain in office. This announcement was made

    another surgery related to his battle with pelvic cancer. As a result of this operation there is

    a possibility that he may not be well enough to return to

    inauguration. The more unfavourable

    the more the market responds positively to Venezuelan sovereign debt.

    Prepared by: VMWM Research Department; January 7, 2013

    Historical Data*

    have been charting an upward trajectory and,

    due to the great deal of speculation regarding the health of

    and the foundation of his aspiring 21st century socialist administration

    benchmark 2027 dollar bond, traded at its highest on December 10, 2012 to bid

    with a yield of 8.863%. This is characteristic of all the illustrated Venezuelan sovereign

    which traded at their highest around the same date.

    ability to begin his third term as the Venezuelan president has come directly into

    question after he announced his successor, Nicolas Maduro, in the event

    announcement was made before he left for

    his battle with pelvic cancer. As a result of this operation there is

    a possibility that he may not be well enough to return to Venezuela for the January 10, 2013

    inauguration. The more unfavourable the outcome of President Chávez

    the more the market responds positively to Venezuelan sovereign debt.

    Page 7 of 11

    , in December 2012,

    great deal of speculation regarding the health of

    socialist administration. The

    benchmark 2027 dollar bond, traded at its highest on December 10, 2012 to bid $103.125,

    illustrated Venezuelan sovereign bonds

    ability to begin his third term as the Venezuelan president has come directly into

    in the event that he is unable

    before he left for Cuba to undergo

    his battle with pelvic cancer. As a result of this operation there is

    Venezuela for the January 10, 2013

    Chávez’s health becomes,

  • Prepared by: VMWM Research Department;

    Venezuela Bonds – Historical Data

    As bond prices recently rallied, these record

    the market to the possibility that, Hugo

    in the near future. In the event that Hugo

    further speculation as elections will have to be held within 30 days after which, the market

    will anticipate what policies the new administration

    Prepared by: VMWM Research Department; January 7, 2013

    Historical Data*

    hese record low yields may be indicative of the reaction by

    the market to the possibility that, Hugo Chávez may not be the leader of this oil rich country

    In the event that Hugo Chávez is unable to be sworn in

    as elections will have to be held within 30 days after which, the market

    new administration pursues.

    Page 8 of 11

    may be indicative of the reaction by

    may not be the leader of this oil rich country

    is unable to be sworn in, there will be

    as elections will have to be held within 30 days after which, the market

  • Prepared by: VMWM Research Department; January 7, 2013

    Page 9 of 11

    Venezuela Bonds – Historical Data*

    As at December 2012, the cost to insure against a potential default or restructuring of

    Venezuelan debt had declined significantly as the spread on Venezuelan five-year credit

    default swaps have narrowed since and investors remain attracted to the fairly high yields

    on Venezuelan sovereign bonds.

    *Historical Data Retrieved from Bloomberg as at December 31, 2012

  • Prepared by: VMWM Research Department; January 7, 2013

    Page 10 of 11

    Venezuela Bonds: Duration Analysis

    Duration is a tool used to measure the approximate percentage rate of change of bond

    prices with respect to yield. This type of analysis follows the concept that interest rates and

    bond prices are inversely related. Duration analysis is useful to investors in the sense that it is

    a measure of risk which demonstrates the sensitivity of bond prices to a change in interest

    rates.

    Based on the duration calculations, for every 100 basis-point (1%) decrease in interest rates

    for the 2022, 2027, 2028 and 2038 bonds it is expected that bond prices will increase by

    5.59%, 7.82%, 7.93% and 10.27% respectively. In this context, it is highly likely that the

    Venezuelan central bank will be further motivated to adjust interest rates downwards in

    order to encourage continuous investment and consumption within the economy.

    Considering the fixed-rate nature of these Venezuelan sovereign bonds, if there is a

    reduction in interest rates, investors will see bond price changes reflective of the increasing

    volatility associated with a longer time until maturity.

    Outlook & Recommendation

    In the near term, the outlook on Venezuela is very uncertain as the market responds to

    Chávez’s health woes. Generally, in 2012 bond markets outperformed many forecasts and

    outlooks due mainly to accommodative policy measures. For the conservative/typical

    investor, it appears that they may have missed the boat with the recent rallying of

    Venezuelan sovereign debt especially as there is a lessened growth in the developed-

    market due to anticipated monetary policy accommodations and more liquidity provisions.

    After this series of rallying, by December 17, 2012, the cost of underwriting government debt

    in the event of a default went back up to reverse a portion of recent profits. Despite the

    obvious political risk, based on the 2012 overall performance of emerging market debt

    (13.61% in returns on a market value-weighted basis) it would appear that there is still

  • Prepared by: VMWM Research Department; January 7, 2013

    Page 11 of 11

    potential for exceptional returns (in the form of attractive yields along with capital

    accumulation) within the market for bond-holders and potential investors. As it relates to the

    aforementioned Venezuelan sovereign bonds, the ability of the country to generate

    revenues and service their debt remains robust and, as such, for the long-term we

    recommend these bonds as a BUY. However, it is clear that a diversified and balanced

    portfolio is what will bring favourable returns to avid investors in this uncertain global macro-

    economic climate.

    Disclaimer: This Research Paper is for information purposes only. The information stated herein may reflect the opinion and views of VM Wealth Management in relation to market conditions and does not constitute any representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. Before making any investment decision, please consult a VM Wealth Management Advisor.