Venezuela: Nothing's Going on, but PDVSA


An unfavorable macroeconomic situation, coupled with the political uncertainty that followed Hugo Chavez's election for president seem to have temporarily dampened the prospects for Venezuelan securitizations.

On the economic front, a severe recession has weakened credit demand and prompted Duff & Phelps (DCR) to assign relatively pessimistic foreign and local currency ratings of single-B-plus, while declining loan interest rates mean that banks are a more appealing source of financing than the capital markets.

In the political arena, Chavez has kept international observers on their toes. Since his inauguration, he has sent mixed messages regarding foreign debt payments, acquired extraordinary powers and is now embarking on a thorough - and controversial - reform of Venezuela's constitution.

Excess Liquidity Meets Lack of Appetite

A key factor inhibiting development of asset-backed deals is the lack of investor appetite for long-term paper. As a result, most companies in search of funds turn to local banks or commercial paper with maturities ranging from 30 to 90 days.

"With the high inflation rates and the political and economic instability people are simply not willing to tie up their funds for an extended period of time," explained Franklin Santarelli, senior analyst with DCR.

The prospects for residential mortgages, often cited as an asset class ripe for securitization, have been hindered by this trend. A savings-and-loan institution that structured a mortgage-backed deal and had hoped to issue before year-end, finally decided to postpone indefinitely what would have been the country's first mortgage-backed securitization.

"Until the overall conditions in the markets improve, MBS deals will not be feasible," said a source familiar with the market.

Another constraint for securitization is the high degree of liquidity in the domestic market. During the 1994 financial crisis, the central bank was forced to inject a huge amount of capital to prevent banks from defaulting on their obligations. As a result, market liquidity doubled in less than six months and banks lost most of their incentives to securitize their assets.

"Banco Mercantil and Citibank recently securitized auto loan receivables with very positive results," one market watcher said. "Yet they are the only financial institutions currently taping the asset-backed market. Until some of the liquidity is soaked up, banks and finance companies will have no real reason to diversify their funding sources."

An additional outcome of the financial crisis was a 0.5% federal tax imposed on withdrawals from all bank accounts. The measure, which will be in place until May of next year, makes both purchasing and issuing notes through bank accounts more costly.

"We are seeing longer maturities because of this new tax provision," said Santarelli. "At the same time, longer maturities make the notes less attractive for the majority of short-term investors out there."

PDVSA Heads International Deals

Venezuela's presence in the asset-backed arena might be limited but, thanks to state-owned oil company Petroleos de Venezuela S.A. (PDVSA), it is far from negligible.

So far this year, PDVSA has issued two deals from its new oil exports-backed $6 billion program. In March 1999, PDVSA Finance, a wholly owned subsidiary of PDVSA domiciled in the Cayman Islands, sold four tranches of notes totalling $1 billion as well as another Euro-denominated tranche totalling E200 million. This brought the total issuance amount under the program to approximately $3.25 billion.

Yet, according to the president of the company, PDVSA will not access the capital markets again this year and with PDVSA out of the picture, there is limited potential for other international deals out of Venezuela, at least in the short term.

"There are very few good quality issuers in Venezuela," said Rohinton Dadina, assistant vice president in the international structured finance group at DCR. "There is potential for non-investment grade deals but I don't see many investment grade deals happening in the near future."

Pension Funds Are Needed

Going forward, the outlook for securitization will largely depend on the introduction of pension funds, which currently do not exist in Venezuela.

Chavez's predecessor, Rafael Caldera, had approved the law for the introduction of pension funds by January next year, but following the election of a constituent assembly designed to reform Venezuela's constitution, the pension fund law is stalled.

"The market desperately needs investors willing to buy long-term paper," said Santarelli. "Pension funds would be a crucial component for the future prospects of securitization."