Digging Venezuela out of the mess Chavez has plunged it into...

Veneconomy: PDVSA is offering two new bond issues of US$3 billion each. The first is PetroBono 2013 offered in replacement of PDVSA Bond 2011. This issue comes with a coupon at 8% and matures on November 17, 2011.

The second is PetroBono 2017, the purpose of which is apparently to finance PDVSA's investment projects, including "the social and comprehensive development of the country." However, it is thought that the proceeds from this issue will end up being frittered away to cover the revolution's expenses.

This issue matures in 2015, 2016, and 2017 and comes with a coupon at 8.5%. The bond is denominated in dollars as it is being offered to investors for payment in bolivars at Bs.F 4.30/$.

It is commented that demand for the 2017 issue will be high, and for that reason it could be increased to $4.5 billion.

It is assumed that the vast majority of buyers will resell their bonds on the European market to obtain the foreign currency needed to cover companies' urgent needs, in particular for the purchase of raw materials, servicing debt, and honoring other liabilities.

Added to that there is the $1 billion that will be acquired by the Central Bank to be resold gradually via SITME (System for Foreign Currency Securities Transactions).

Analysts estimate that the 2017 issue could be traded at between 65% and 75% of its face value, which suggests an implicit swap rate of between Bs.F 6/$ and Bs.F 7/$.

Assuming that the bond will be traded at the higher price (75%), it could end up with a yield of 16.5% at maturity. This 16.5% would be the true cost of the issue for PDVSA and the country.

There is no other country in the world that is so badly managed and so broke that it has to pay 16.5% in order to obtain financing or gain access to credit.

This issue may be welcomed by many in the short term, given the tremendous demand for foreign currency in the country as a result of the inflexible exchange controls; but in the short term it will be highly prejudicial for the entire population as, once again, it will permit the government to put off implementing sound policies for digging Venezuela out of the mess Chavez has plunged it into.