The Bono del Sur or “Bond of the South” is currently being offered by the Venezuelan government in the domestic market. Far from being a new financial mechanism, the bonds are composed of three debt instruments (see table below), meaning that buyers will pay one price in order to receive three different financial instruments that can be sold separately. Results will be announced next Monday (13 November). However, some restrictions apply. Although the Argentine bonds can be sold immediately on foreign markets, the Venezuelan component can only be negotiated on the domestic market after the Central Bank creates the regulation for its trading.

From the Argentine perspective, the issue brings neither financial engineering nor lower financial cost, being the same kind of bond placement that occurred in the past when the Treasury sold bonds directly to the Venezuelan government. In that operation, the government of Argentina's President Néstor Kirchner sold Venezuela US$420 million in Boden12 bonds priced to yield 7.7%, a return similar to that observed in the secondary market for this instrument. This implies that Argentina will not receive any gains from the lower financial costs enjoyed by Venezuela. The only clear benefits coming from this operation are the reconfirmation of Venezuela as the key financing agent for Argentine bond placements, and the early financing of the 2007 budget.

In order to complete the portion of Argentine bonds that make up the Bono del Sur, Venezuela added almost US$80 million of Boden15 bonds that were already part of its portfolio, acquired in 2005 at a price that yielded 8.75%. This spread to be earned is the first benefit for President Chavez. In addition, since the operation needs to be paid in bolivares, the Venezuelan currency, this sale will help the central bank to withdraw some of the excess liquidity from its economy. Finally, given the fact that domestic investors are very likely to take large positions on the bonds in order to sell them abroad in U.S. dollars and make an arbitrage gain between official and parallel exchange rates in Venezuela (currently at 38.9%), the margin between these two is expected to decrease.

Outlook and Implications

The bond sale is not exactly an auction, because the selling price has been already set by the Venezuelan Treasury at 95.5%, meaning that the only important number to come out on the settlement day, next Monday, will be total demand, a measure of the appetite for this instrument. The level of total demand, however, will be very important because both governments have made commitments to another bond sale with similar characteristics by the end of the year.

In addition, according to President Kirchner's government officials, an issue of Argentine bonds, Bonar VII, for US$1 billion will follow this operation as the authorities continue moving forward the financing provision needed for 2007. The last auction of Bonar VII, which took place early in September, was priced to yield 8.4%, slightly above market expectations

Contact: Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

http://www.globalinsight.com/ and http://www.wmrc.com/