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Chavez Health Concerns Make Venezuelan Bonds Best Performers

Venezuelan President Hugo Chavez
Venezuelan President Hugo Chavez is pictured during a meeting with students in Caracas, on Feb. 10, 2012. Photographer: Juan Barreto/AFP/Getty Images

Venezuelan debt returned the most in emerging markets this month as investors boosted holdings of the oil producer’s bonds on speculation President Hugo Chavez’s deteriorating health will prevent him from seeking re-election.

Venezuelan bonds returned 14 percent this month through yesterday, compared to 7.4 percent for the Ivory Coast, 5.2 percent for Vietnam and 3.1 percent for Belarus, according to JPMorgan Chase & Co.’s EMBI Global index. Year-to-date, Venezuela’s dollar bonds have returned 22 percent.

Chavez, 57, has made Venezuela one of the world’s riskiest credits by exerting more state control over the economy through nationalizations and price controls. The president was operated on in Cuba this week to remove a possibly malignant lesion in his pelvis, his third surgery in a year, delaying his plans to campaign for another six-year term. Venezuela’s borrowing costs, the highest in the Americas after Belize, have plummeted as crude oil prices surge and as the opposition rallies around a single candidate to challenge Chavez in October elections.

“The market may be putting more weight on the probability that he won’t be able to run come October for health issues,” Stuart Culverhouse, chief economist with London-based investment bank Exotix Ltd., said in a phone interview. “That would play to the opposition’s advantage and create a more investor-friendly backdrop.”

Exotix has a buy recommendation on Venezuelan bonds maturing in 2019.

‘Good Health’

Chavez is in “good health” after doctors extracted the lesion, and tests will determine whether the growth is malignant or what treatment may be needed, Vice President Elias Jaua said yesterday in a speech to the National Assembly.

Venezuelan bonds, which have gained in 2012 on improving sentiment in the global economy and surging oil prices, rallied further this month after Chavez said tests revealed the lesion. He had declared himself “illness free” in October.

The yield on Venezuela’s benchmark 9.25 percent bonds maturing in 2027 has fallen 193 basis points, or 1.93 percentage point, this month to 10.67 percent, according to data compiled by Bloomberg. The bond’s price surged 12.03 cents to 89.33 cents on the dollar.

“We’ve seen in general the assets judged most risky a few months ago performing the best,” said Richard Segal, credit strategist for emerging markets at Jefferies Group Inc. in London. “Countries that have performed well have their own special factors, and in Venezuela, that’s the electoral issue.”

Buy Recommendation

Segal said that he’s recommending investors buy Venezuelan bonds with a maturity of no more than three years.

The extra yield that investors demand to own Venezuelan debt over U.S. Treasuries has plunged 235 basis points in February to 920. That compares to a fall of 56 basis points for the EMBI Global index in that period.

The yield spread widened today for the first time in eight days.

Venezuela, which depends on oil for 95 percent of export revenue, saw the price of its crude export basket surge 7 percent in February to $114.59 a barrel, the highest since August 2008.

The rise in oil prices supports the government’s ability to pay its debt, and has helped push down the cost of insuring Venezuela against default with 5-year credit default swaps.

‘Positive Backdrop’

“The boost to oil revenues will also support sentiment toward Venezuela and risk assets, that’s certainly a positive backdrop,” Exotix’s Culverhouse said. “The domestic factors are there, more so than in recent years.”

Rising oil prices and an increased possibility that Chavez may not be able to stand for re-election led Bank of America Merrill Lynch to raise its recommendation on Venezuelan debt to “overweight” from “market weight” on Feb. 22.

The probability of Chavez being unfit to run for re-election is now more than 50 percent, Citigroup Inc. said Feb. 27, citing conversations with medical specialists.

Ivory Coast, which pledged to resume payments in January on its defaulted bonds due in 2032, has returned 24 percent this year and 64 percent during the past 12 months, the best performance on the index.

Chavez has led the OPEC nation since 1999, polarizing the country with his socialist policies to increase state control over the economy through nationalizations and capital controls that have fueled one of the world’s highest inflation rates.

Chavez will face Henrique Capriles Radonski, a 39-year-old governor of Miranda state, in the elections after Capriles won a primary election on Feb. 12 by more than 30 percentage points.


Ajata Mediratta, a portfolio manager at Greylock Capital in New York who oversees about $400 million of emerging-market assets, said that if he adds to Venezuelan bonds it would be with securities of state oil producer Petroleos de Venezuela SA as the credit is “essentially sovereign risk” and pays a higher yield.

“We’ve been overweight for a while with the view that it’s structurally cheap, there aren’t many countries with that kind of yield and liquidity,” Mediratta said in a phone interview. “With the opposition getting its act together and the potential that Chavez’s energy level may be down, you can actually see a road map for change.”

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