Venezuela: Summary Bond Termsvmwealth.vmbs.com/documents/VenezuelaBondsAnalysis-Jan2013.pdfVenezuela: Summary Bond Terms Venezuela Bonds 12.75%, 2022 9.25%, 2027 9.25%, 2028 7%, 2038

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.