By Daniel Bases
CARACAS -- Leftist Venezuelan President Hugo Chavez heads off to Cuba for a check-up on his cancer this weekend, leaving investors to wonder if his health will be a help or a hindrance to the value of the nation's debt.
In June, when the 57-year-old Chavez revealed a cancerous tumor was removed from his abdomen, Venezuelan bond prices rose and the cost to insure its sovereign credit risk fell on prospects that his 13-year socialist policies might wane.
A Chavez health premium has been priced into the market, helping soften the fall endured when global markets lurched down from July through September on Europe's sovereign credit woes and weak U.S. economic data.
His disappearance from public view for several weeks only helped, investors and analysts say.
He has since returned to the airwaves with a vengeance and therein lies a problem for the government, which this week announced the sale of an additional $3 billion in debt, bringing the total for the year to $15.2 billion, by far the most issued in Latin America.
State-run oil company PDVSA accounts for $8 billion of the issuance, with fears of more to come before the year is out.
"At the moment, Chavez is not serving as an additional positive catalyst for Venezuela just because he is so active on the media front," said Enrique Alvarez, Latin American debt and currency analyst at IDEAglobal in New York.
"The more sick he is, the better it is for Venezuelan debt. Though perverse, that is the reality."
This week, the cost to insure both Venezuelan and Argentine debt nearly reached parity, collapsing from a two-year average spread where investors paid an extra $281,000 annually for five years worth of security from defaults or restructurings.
Deterioration in Argentina's five-year credit default spread was behind much of the move. And while Argentina is a country with atypical debt dynamics itself, Chavez's cancer is seen as one main reason for Venezuela's steady performance.
The costs have come down for both nations as the global market environment improves, but the gap is widening again.
"Venezuela hadn't widened as much as the other higher-beta plays. They were already in bad shape," said James Croft, head of EM fixed-income trading at Mitsubishi-UFJ in London.
"There has been a massive recovery in all risk assets in the last 10 days" as a result of the European Union recognizing the need for a coherent plan, including a focus on bank recapitalization, he said.SPENDING FOR VOTES
On Tuesday, the Venezuelan government launched a new $3 billion, 15-year debt offering during a week in which global market sentiment improved on hopes Europe made progress on its sovereign debt woes. Fitch rates the debt at a low B-plus.
It was also a chance to announce more pre-election spending on flagship social projects for housing and agriculture as well as the day before one leading opposition candidate relaunched his challenge to Chavez just as the incumbent is off to Cuba.
The debt, sold in local bolivars but paid in U.S. dollars, is an important conduit for Venezuelans to get greenbacks amid tight exchange controls and 26.5 percent annualized inflation.
It lets foreigners legally buy the bonds at a rate better than the official 4.3 bolivars per U.S. dollar but not as good as 8 bolivars available in the black market.
The government is not getting a great deal, analysts say.
Venezuela launched its sale at a discounted price of 95 cents on the dollar and a coupon of 11.75 percent. Final pricing is imminent, but already the bonds are drawing a price in the range of 72 to 73 cents.
According to Russ Dallen, head of Caracas Capital Markets, the yields are now pushing up into the 16 percent to 18 percent range.
In comparison, Mexico's state-run oil company Pemex this week sold $1.25 billion of debt that won't mature for another 30 years with a coupon of 6.5 percent.
"Markets understand the (Venezuelan) system is so unstable but the bonds pay well. Everything has a price and if the price is right, people will buy it, even if it is a horrible product," said Alberto Bernal, head of research at BullTick Capital Markets in Miami.
These high-yielding coupons contrast to the 5 percent coupons Chavez got when he set up a currency regime in 2003.
"Most people would not have done the deal Venezuela is doing because it doesn't make economic sense," said Dallen.AT ANY PRICE?
Even if this latest debt offer doesn't make economic sense, the general consensus is Venezuela is good for the money. And so far, Chavez has also maintained his willingness to pay.
According to the Central Bank of Venezuela, the nation's debt-to-GDP ratio stood at 23.1 percent at the end of August, among the lowest globally.
"So there are three ideas for issuing. The first is Venezuela has no alternative but to issue. Second, you intend to default. Or, third, you believe oil prices will remain so high and that production increases so much that you believe you can pay these rates," Dallen said.
"One of these three has to be in Chavez's head."
Given the spate of pre-election borrowing, which included a record-setting $4.2 billion issue in July, more is expected, and that is leading some to put increasing odds on a default.
"A default possibility has to be considered, particularly after the elections in 2013-2014, but to know how possible it is is impossible," said a report from Econometrica, a Venezuelan economic research firm.
"The world is more uncertain than risky. And about that, the price of petroleum has a main role to play."
Some investors are keeping an eye on Venezuela's unorthodox borrowing, especially with financing accords signed with China that are repaid with oil or a combination of oil and cash.
"There is a slight, but growing, concern over the way some of the financing has been structured. China is getting repaid in oil at the wellhead, which effectively makes them senior in the debt structure to investors who hold the sovereign bonds," said AJ Mediratta, senior managing director at Greylock Capital Management in New York. REUTERS