BANKERS were predicting yesterday that the Republic of Venezuela would launch its long awaited $500m deal mandated to JP Morgan next week -- but not in the plain vanilla 20 year form initially proposed.Shell-shocked by its bonds' recent spread widening -- made worse this week by Moody's two notch downgrade to B1 -- Venezuela is considering either a shorter maturity of five or seven years or a structured 20 year deal with either a step-up or resettable coupon."If Venezuela does something it will be very quick, with no roadshow -- probably a conference call announcing a five or seven year or a structured note," said a syndicate manager.The Venezuelan government has been anxious to issue the deal before the end of July so that it can focus on raising an additional $2.1bn from supranationals and the international markets to help plug its fiscal gap. A wire service quoted an unnamed government official last week as saying that the roadshow for the offering would be held at the end of July.Neither JP Morgan nor the republic would comment yesterday. However, with the Venezuelan 2027 global bond trading around 715bp, from 554bp in mid-June and a 325bp launch spread a year ago the 20 year plain vanilla proposal could be altered."Doing a 20 year Venezuelan offering would be a very difficult deal to get done," said a banker at a rival firm. "We have been crushed here today," he added, referring to the sudden collapse of spreads on Thursday in the emerging markets after a brief rally earlier in the week when Russia's GKO exchangeable bond issue soared in price.Spreads widened about 20bp to 50bp across the board on Thursday and some bankers suggested that Venezuela would have to pay in the 800bp region for a 20 year new issue. A straight seven year would also carry a hefty spread. Spread differentials between 10 and 30 year bonds for Latin sovereigns is generally around 50bp, with Mexico's differential around 60bp. On that basis some bankers expect a Venezuelan seven year would come at 655bp or higher.A five, seven or 10 year bond would make more sense for Venezuela, however, because it does not have a liquid benchmark at any of these points on the curve.But JP Morgan could structure the 20 year bond to offer a resettable coupon, having witnessed the success of Pemex's recent monthly resetting coupon deal and similar offerings from BNDES and the Republic of Argentina. Venezuela has been inundated with proposed structured note issues from rival firms in recent weeks. In line with the Venezuela's downgrade, Moody's also cut the ratings of PDVSA, the oil concern, CANTV, the privatised telecom company and six Venezuelan banks -- Banco de Caracas, Banco del Caribe, Banco Mercantil, Banco Provincial, Banco Union and Banco de Venezuela. Moody's pointed to the government's inability to address the domestic implications of external oil shocks as the reason for the downgrade. The mini fiscal reform package announced by the government last week was cited as an example of poor policy response to lower oil prices.Brazil was said this week to be considering a re-opening of its global bonds due 2001 and Argentina, keen to pre-fund at least a full quarter of 1999, has also been standing ready for any window of opportunity. "If the market had stayed calm we would have seen Argentina in the market in the next week or two," said a syndicate manager in New York. *
July 24, 1998
