UBS Sells Largest Structured Note Tied to Venezuela Since 2009

UBS AG sold the largest structured note tied to Venezuela in five years, offering a yield of almost 14 percent as political upheaval triggered a jump in the nation’s corporate credit risk.

The Swiss bank sold $65 million of securities linked to the debt of Petroleos de Venezuela SA, according to data compiled by Bloomberg. The cost of insuring $10 million of the company’s bonds against default for five years jumped to $3.4 million in advance and $500,000 annually this week, according to CMA prices for credit-default swaps, compared with $3 million upfront at the start of the year. The contracts signal a 66 percent probability of default.

Investors in structured notes locked in yields as the government of President Nicolas Maduro struggles to respond to Venezuelans protesting against crime and shortages of primary goods. Controls on foreign exchange spurred the nation’s annual inflation rate to 56 percent, the fastest in the world, Bloomberg data show.

“There’s renewed interest from our sophisticated clients to take exposure to these markets at more attractive levels,” said Hana Dunn, a spokeswoman for UBS in London.

With revenues of $123 billion and debts of $40 billion in 2012, PDVSA is the largest company in Venezuela. Fully-owned by the government, its debt mirrors price movements of sovereign securities.

PDVSA’s $6 billion of bonds maturing in November 2017 are trading at around 83.5 percent of face value, implying a yield to maturity of 14.4 percent, according to Bloomberg bond prices. An equivalent government note maturing in August 2018 yields 14.2 percent, the data show.

“You can make the argument that PDVSA has assets abroad and may have a better recovery in case of default, but when the sovereign goes under, PDVSA goes down too,” said Edwin Gutierrez, emerging-market debt portfolio manager at Aberdeen Asset Management Plc in London.

Nomura Holdings Inc. issued $78.5 million of 10-year notes tied to the Venezuelan sovereign in May 2009, according to data compiled by Bloomberg. Before that, Lehman Brothers Holdings Inc. sold $151 million notes tied to PDVSA in January 2008. The securities are in default following the bankruptcy of the issuer later that year.

To contact the reporter on this story: Luca Casiraghi in London at lcasiraghi@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Michael Shanahan, Tom Freke

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