Chavez’s 692% Bond Gain Seen Living On to Fidelity: Andes CreditBoris Korby, Ye Xie and Danielle Verbrigghe
If you liked the 692 percent bond return Hugo Chavez delivered during his 14 years as Venezuelan president, Fidelity Investments and Schroder Investment Management Co. say you have nothing to fear from his successor.
Vice President Nicolas Maduro, who takes over as interim president and is favored in polls to win emergency elections, pledged to continue his socialist mentor’s plan upon announcing yesterday that Chavez died after a two-year cancer battle.
His policies, which included currency controls and the seizure of more than 1,000 companies, deterred many bond investors and kept the nation’s overseas borrowing costs at an average 12.39 percent during his presidency, or 3.78 percentage points above emerging-market government debt. While Venezuela faces the risk of political infighting and social unrest, Fidelity and Schroder say Maduro will follow his predecessor’s lead and keep paying bondholders to ensure oil exports that fund half the country’s budget. Chavez never missed a payment, producing returns that more than doubled the regional average.
“Maduro would likely follow the previous model, and yields will probably remain elevated unless there is a regime change,” Luis Martins, a portfolio manager at Fidelity in Boston who helps oversee $16.5 billion and has been investing in Venezuela for almost 20 years, said in a telephone interview. “Investing in Venezuela is a question of risk management. If these guys are paying you -- in a world of zero interest rates -- 9 or 10 percent, very few things beat this.”
Maduro, who served as foreign minister for six years before being appointed vice president in October, dispatched the army and police to prevent outbreaks of violence after announcing Chavez died in a Caracas hospital yesterday afternoon. Maduro will take over as interim president until elections are organized within 30 days, Foreign Minister Elias Jaua said last night. Chavez tapped Maduro in his final public speech on Dec. 8 to represent his government in that vote.
Venezuela’s dollar-denominated bonds, which are rated four levels below investment grade by Standard & Poor’s, have rallied 26 percent over the past year, swelling their return to 692 percent since Chavez’s inauguration in 1999.
The gains, equal to an annualized 14.7 percent, topped those from investment-grade countries including Brazil, whose debt returned 656 percent, and beat the 370 percent emerging-market average over that period, according to data compiled by JPMorgan Chase & Co.
While the government’s average bond yields have fallen to 9.06 percent from 10.91 percent a year ago, they still paid 4.39 percentage points above the average for emerging-market sovereign dollar-denominated debt globally yesterday.
The yield on the government’s $4 billion of notes maturing in 2027 rose 28 basis points, or 0.28 percentage point, to 9.26 percent at 5:24 p.m. in New York. Credit-default swaps used to protect Venezuelan debt against non-payment for five years rose 20 basis points to 661 basis points.
“The key thing is that Venezuela will keep servicing its debt,” James Barrineau, director of Latin America at Schroder, which manages $327 billion in assets, said in a telephone interview from New York. “The last thing the Chavistas want is to create a crisis in the economy. They will try to maintain things the Chavez way as much as possible.”
Chavez unveiled his self-proclaimed socialist revolution after turning the notoriety he gained from a failed 1992 military coup attempt into a landslide victory in elections six years later. He rewrote the constitution, seized companies in industries ranging from cattle ranching to steelmaking, imposed caps on consumer prices and oversaw five currency devaluations.
While government spending fueled by a 10-fold surge in oil helped cut Venezuela’s poverty rate in half as Chavez opened government-run markets with subsidized appliances and handed out homes to the poor, his currency controls and import restrictions fanned the fastest inflation in the Americas and resulted in shortages of basic goods from milk to eggs to toilet paper.
Chavez radicalized his agenda following a 2002 coup that removed him from power for 48 hours and after a two-month general strike later that year that paralyzed the oil industry, the source of 95 percent of the country’s exports. He responded by firing more than 18,000 employees at Petroleos de Venezuela SA, the state oil company, and replacing its board.
The strike caused the economy to shrink 27 percent in the first quarter of 2003 while unemployment rose to 20 percent. Chavez accused the U.S. of orchestrating the attempted overthrow in 2002, and in 2006 he called then-President George W. Bush the “devil” during a speech at the United Nations.
Sanctions that prohibited Chavez from buying military equipment from the U.S. prompted him to turn to Russia, China and Iran as commercial partners. He defended Libyan dictator Muammar Qaddafi as he fought a 2011 rebellion, and led a bloc of Latin American countries including Cuba, Bolivia, Argentina and Nicaragua in opposing U.S. policies in the region.
Venezuela bolsters its health system with thousands of Cuban doctors and nurses who work in the country in exchange for a daily supply of oil to the island nation.
“He left a country with an economic mess,” said Ricardo Hausmann, a professor at Harvard University in Cambridge, Massachusetts, who served as planning minister for Carlos Andres Perez, the president Chavez tried to topple in his coup attempt. “This country is not in a steady state at the moment. It’s in an explosive spiral. There’s nothing suggesting to me that they have a clear idea how to manage this crisis. The bubble has burst.”
The country faces the risk of political infighting and social unrest, according to analysts including Peter Hakim, president of the Inter-American Dialogue in Washington, and Stephen Johnson, former director of the Americas Program at the Center for Strategic and International Studies in Washington.
Former National Assembly President Fernando Soto Rojas said last night that Diosdado Cabello, the country’s current national assembly leader, must be sworn in as interim president, state news channel Telesur reported. Jaua, the foreign minister, said less than two hours later that Maduro would serve that role.
Chavez returned to Caracas in early December from Cuba, where he was receiving cancer treatment, to announce he was to undergo his fourth operation in 18 months and to make clear he wanted Maduro, a 50-year-old former union leader and bus driver, to succeed him.
“There is risk in this process that you can’t deny,” Chavez said during a late-night address from the presidential palace, flanked by Cabello, who took part in the 1992 coup attempt, and Maduro. “It’s my firm opinion, clear like a full moon, irrevocable, absolute, total, that in a scenario that would oblige new presidential elections that you should elect Nicolas Maduro.”
Maduro took over as vice president following Chavez’s re-election victory over opposition candidate Henrique Capriles in October. Capriles, who has proposed opening up the oil industry and dismantling currency controls, urged the government to respect the constitution last night.
A Hinterlaces Poll done between Feb. 16 and Feb. 23 found 50 percent of Venezuelans would support Maduro while 36 percent would support Capriles, the governor of Miranda state, in emergency elections. Hinterlaces interviewed 900 people for the poll, which had a margin of error of 3 percentage points.
Maduro pledged to “take up the legacy of Chavez, his plan, his challenges” as he sobbed on state television yesterday. Hours earlier, Maduro called for an investigation into a theory that Chavez’s enemies infected him with cancer as he expelled U.S. embassy officials from the country.
In December 2011, Chavez said that the U.S. may be behind a “very strange” bout of cancer affecting him and other South American leaders who were aligned with him.
While the rhetoric is unconventional, the government has to keep servicing foreign obligations to maintain access to international credit markets and prevent investors from trying to seize the country’s oil shipments, according to Fidelity’s Martins. PDVSA, as the state oil company is known, owns Houston-based Citgo Petroleum Corp.
“Major oil companies need access to capital markets,” Martins said. “Defaulting would not be in their best interests and debt investors are pretty much at the top of the pecking order, no matter who’s in power.”