Venezuelan 2027 bonds are now yielding 1.7% over comparable treasuries. Thus, rational investors would not expect a credit loss of greater than 1.7% per year.

(This is a simplified model in many ways, but close enough for this analysis.)

The credit loss would be the probability of a credit event times the expected loss in a credit event.

(So, for example, a 10% chance of a credit event times a 50% loss if such an event happened would be an expected annual default loss of (.1*.5)=5%)

Any investor in these bonds must expect an annual credit loss of less than 1.7%.

Recently, Argentina "got away with" giving foreign creditors a 66% loss of principal. If Chavez decided to stick it to the dollar bond holders (like he shows every indication of doing to many foreign equity owners), there is no reason to expect that the bondholders would recover more than 33%.

So, we then solve for 1.7% = X * .66 = 2.57% This shows that an investor in these bonds must expect a less than 2.57% chance of Chavez defaulting, or a greater than 33% loss given default.

Given his political sensibilities, thoughts on economics and investors in general, and massive spending plans, would you bet that there is only a 2.57% chance of Chavez defaulting? I wouldn't. I also wouldn't bet on an only 66% loss given default. I wouldn't be surprised if there was an event where the loss given default on these bonds was 100%.

Read Venezuelan Dollar Bonds Rise, Rebounding From Last Week's Drop





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