All-in, we think the driver of the spread is more related to the better cash inflow position that PDVSA has over the government to sail through the eye of the hurricane of low oil prices.

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Venezuela Weekly Report

Vennynomics: Where Conventional Wisdom Fails

August 14, 2015 / By Hernán Yellati & Guillermo Quiroga

•     Our Venny index shows big pricing difference between VENZ-PDVSA suggesting different default perceptions
•     We adjusted our Venezuelan oil price forecast and cash deficit estimates
•     Despite recent events, China will not to let Venezuela fall so easily

According to our Venny Index (BTCO <GO> on Bloomberg), the weighted price average of sovereign bonds is c5 dollars less than the weighted average price of quasi-sovereign bonds (PDVSA). True, both curves are different but there are illustrative examples when comparing similar bonds as the case of VENZ’22 versus PDVSA’22. Virtually, those papers are the same as they mature close to each other (six-month difference) both are sinkable, have the same coupon and a 0.99 four-year median correlation. Nonetheless, PDVSA’22’s average y-o-y price spread is 1.4 dollars over VENZ’22. From these facts a market perception being showed in our view that can be translated as: “in the worst case scenario, the government will decide to default on sovereign bonds, rather than PDVSA’s”. The logic behind it suggests that government-related assets are less vulnerable than PDVSA’s assets (i.e.: CITGO) during a hypothetical default. Although this could be technically true, we disagree as it may be argued that PDVSA serves as an alter ego entity of the government given its state-owned status. All-in, we think the driver of the spread is more related to the better cash inflow position that PDVSA has over the government to sail through the eye of the hurricane of low oil prices.