Ok, hands up who remembers this line from yesterday's snippets;
"Why has Lehman Brothers (LEH) suddenly become interested in the Venezuela parallel rate and the role of Moris Beracha in the country's finance policy? All will be revealed shortly, I'm quite sure."
Well, we didn't have to wait long. Here's a PR from Lehman this morning, and while you're reading through, reflect on how incredibly connected this little Otto must be:
"Why has Lehman Brothers (LEH) suddenly become interested in the Venezuela parallel rate and the role of Moris Beracha in the country's finance policy? All will be revealed shortly, I'm quite sure."
Well, we didn't have to wait long. Here's a PR from Lehman this morning, and while you're reading through, reflect on how incredibly connected this little Otto must be:
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
----------------------------------------
Lehman Brothers | Fixed Income Research
----------------------------------------
Emerging Markets Intraday Comment
-------------------------------------------------------
Gianfranco Bertozzi September 4, 2008
-------------------------------------------------------
Buy PDVSA
We think that investors should look to own PDVSA bonds at current levels. We
see several reasons to own these assets. All three bonds appear attractive from
different standpoints.
PDVSA 2017s are currently yielding over 11%. We think this is very attractive
for a bond with less than 10-year maturity, and the bonds trade about 80bp wide
to Venezuela 2016s and 100bp above N2018s in z-spread terms. Furthermore, the
2017s appear cheap relative to CDS, as shown in the basis chart below. On a
switch basis, this is the attractive part of the curve, and meanwhile, default
risk is extremely low, in our opinion, for this quasi-sovereign issuer.
[http://llpublic.lehman.com/LAS/UnauthProxy/RSL/jsp/researchDispatcher.jsp?dispatchID=PUBLIC_IMAGE&docID=102105190&streamFile=YES]
Yet while a payment default seems highly unlikely, current CDS spreads are
suggesting a 46% probability of default within 5 years and up to 74%
probability over a 10-year period. Bond-implied probabilities of default are
even higher. Using a constant hazard rate model, we find that the 10-year
cumulative probability of default is 87%. PDVSA has no history of default, and
we believe that oil prices are destined to be higher in the next 10 years than
they have been in the previous 10 years. In addition, PDVSA's recent efforts in
cleaning up Petrozuata debt sends a strong signal to markets about
its commitment to avoiding default.
PDVSA 2027s and especially 2037s may look a little less compelling on a switch
basis, but we think that they are more compelling credits to own outright. Both
are trading near all-time lows on a price basis and are trading close to
recovery levels - these very low dollar price bonds give investors nearly
unparalleled convexity in EM. The bonds have also underperformed CDS in recent
weeks.
Moreover, because VOD is much lower on these bonds, investors can hedge their
position at minimal cost. The investor will need $2.5 million notional of 10-
year CDS to hedge $10 million notional of PDVSA2027s and $2.2 million notional
of 10-year CDS to hedge $10 million notional of PDVSA 2037s to make the trade
VOD-neutral (assuming 40% recovery rate). We think that in a rally fueled by
liability management, stronger oil prices, or improved market sentiment, these
bonds could rally several points. When we look across the asset class, we see
few places where an investor has as much upside and such capped downside.
Gianfranco Bertozzi
Phil Yuhn