Hedge time: despite eager-to-lend banks, Venezuelan companies look to overseas bond markets for financing

Latin Trade, April, 2005 by Mike Ceaser

During times of economic crisis, governments often slap controls on their foreign currency reserves. Known as capital controls, these measures are designed to prevent people from taking their dollars out of the country. In other words, they keep things stable for a while. Venezuela imposed foreign-exchange controls on its dollar supply during the 2003 strike that crippled the nation. As a result, there are lots of dollars in the country's coffers. Oil prices, meanwhile, shot up and stayed there, which pumped even more greenbacks into the country.

With such economic conditions, the country's banks are swimming in liquidity. In response, they have cut interest rates on bank loans to levels below inflation rates. In economic terms, banks are paying you to borrow their money.

But the country's largest power producer, La Electricidad de Caracas, a unit of U.S. electricity giant AES, nevertheless is planning to go abroad to borrow money this year. The trouble and expense of this issue comes right on the heels of a similar US$260 million international bond the company sold in late 2004. Why would anyone want to do that? The reason, says the company, is that in Venezuela nothing is guaranteed, least of all stability. "The best form of protection, of making a hedge, is having the greatest number of financing sources," says Manuel Perez Dubuc, the power producer's vice president for finances.

The company's 2004 bond sale was widely seen as a success--the crest of a rising wave in which the Venezuelan government, state-owned oil company Petroleos de Venezuela and its U.S. gasoline-retail subsidiary Citgo also carried out their own bond issues. Six years ago, Electricidad held about 90% of its debts in bank loans. Today, it has cut that figure down to a third, with another third in loans coming from international lending agencies and the rest held in domestic and international bonds as well as in commercial paper. In addition, the utility nearly quadrupled the average life of its debt to six years. Longer maturities give companies some financial breathing room.

Electricidad is one of the few Venezuelan companies to also have sold domestic bonds of late. Yet it will soon have company, as Venezuela's leading telephone utility CANTV has announced plans to sell $200 million in domestic bonds in early 2005 to help finance the purchase of a small competitor. As for Electricidad, it plans to further improve its debt profile in 2005 by arranging more loans with multilateral agencies. It might even issue long-term bonds in the domestic market, which would be partially backed by the inter-American Development Bank, which is running a program to develop Latin American bond markets, Perez says.

But bond issues are still no cakewalk. Perez says that his company had to overcome suspicions concerning Venezuela's political stability during international bond sales, not to mention obtaining the government's foreign-exchange control agency Cadivi's guarantee that the dollars for repaying the bonds will be made available. Cadivi was extremely helpful to Electricidad, says Perez.

In a fast-recovering economy gorged on record-high oil prices and nurtured by uncharacteristic political stability, many Venezuelan companies are growing and investing in themselves. Bonds are an increasingly popular option, says Alfredo Pirrone, manager for capital markets and project financing for Merinvest, a brokerage house run by Venezuelan bank Banco Mercantil. "Electricidad de Caracas' success has awakened a lot of interest" in bond issues, Pirrone says.

Alfredo Puerta, an investment manager with the Caracas brokerage house EconoInvest, also sees more bond issues, even for some small and medium-sized companies. During the economically disastrous year of 2003, with capital locked up inside the country, companies that weren't going broke reinvested in themselves. Today, loan interest rates are still below inflation rates, but they cannot drop much further, Puerta says. As a result, he predicts, "we'll see many projects for restructuring debts."

Not everybody is so bullish on bonds, says Luis Alejandro Corao Pulgar, executive president of Intervalores, a brokerage house specializing in stocks. Stock prices often rise when a currency devalues. More of the devalued currency will be required to buy healthy companies' shares. But in Venezuela's case, Corao Pulgar says, stock prices are currently undervalued as they have not risen in line with the devaluation of the bolivar, the nation's currency. Several companies must first restructure their capital and then may issue stock, Pulgar says. Still others might head on down to the bank.

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Eager. In recent months, Cadivi--created in February 2003 during the two-month oil-industry strike that failed to force out President Hugo Chavez yet devastated the economy--has loosened its purse strings and given Venezuelan businesses more access to foreign capital. The Chavez administration has been borrowing heavily from the domestic sector to finance its political campaigns and social plans. Banks, nevertheless, are awash in cash and are eager to loan it out. Banco Venezolano de Credito President Oscar Garcia Mendoza, however, doesn't see this scenario lasting forever." This has to collapse," Garda Mendoza says. "It could be today or in 20 years, but it has to fall."