Crystallex International

Even here in Utah, everyone knows that next week Venezuela will issue US$ 3 billion of a 2022 bond, which is surprising, as everyone expected it to be a short term (2012?) bond with a lower coupon.

So, you may ask: what for? Why increase the country’s debt?

Well, it is not for development or investment, it is to support the figment of Chavez’ imagination that the exchange rate is different than what it is. Since the Government does not have enough bucks, it will issue US$ 3 billion of a bond to be sold in Bolivars. Importers will buy it, then tur n around and sell it for dollars.

It may work like this (all speculation, no details yet):

They will have the bond have a coupon of 10.5% (nice and juicy!), sell it at 100% in exchange for Bs. I.e. You pay for each buck bs. 5.3, since the “official rate” for bonds is Bs. 4.3, then if you buy $1,000 you pay Bs. 4.3 for each buck. But later, the bond has to trade at around 14% yield or around 80% (4.3/5.3=81%). thus you pay around Bs. 4,300 per 1,000 bucks of face value, but this you turn around and sell at 80% of face value, so you only get about 800 bucks for your 4,300 or around Bs. 5,3 per $.

The surprising thing is why 2022, the coupon is vety high, 10.5% at least, but go figure. Essentially Chavez is mortgaging the future, somone in 2022 will have to come up with the 3 billion dollars, which all they do is give. Bs. to the Government todat. No investment in the future, just patch up the distortions for a few months.

The bonds will be attractive, a sovereign issue with a 10.5% coupon, but in my mind, this will bost the short term (2011, 2014, 2015…) Pdvsa bonds, as everyone was expecting a short term issue which would increase the probability of default in the short term.

Just a simple view of what everyone expects, if you have Bs., buy cheap dollars if the conditions are anywhere near close where think they will be.

Just they view from Mormon country and no inside info.