PDVSA – An update

4 November 2016


Hi everyone,

In an earlier blog entry in this series (“Nightmares Aplenty – The Continuing Saga of PDVSA and Venezuela “) we discussed the recent attempts by PDVSA and the government of Venezuela to restructure the debt of PDVSA in the face of sustained low oil and gas prices. The original entry in this blog series can be found online at the following location:
http://firstlinesecurities.com/nightmares-aplenty-the-continuing-saga-of-pdvsa-and-venezuela/

In this blog entry, we look at the latest events in the great PDVSA bond swap

Firstline Team

The great PDVSA Bond Swap – a little recap

In September 2016 PDVSA announced the launch of a $7 billion bond swap to alleviate mounting financial pressure on PDVSA – and by extension the Maduro regime in Venezuela – as it stares down the barrel of multi-billion-dollar debt repayments falling due over the next 14 months.

The proposed bond swap covers notes issued by PDVSA that fall due in April 2017 and November 2017 and would allow holders in those notes to trade them in for new notes with maturity dates in 2020. The logic behind the swap is PDVSA is banking on oil prices recovering in the period to 2020 from the low prices experienced since June 2014.

Initially the swap was priced at a one-to-one ratio but an improved offer was made by PDVSA once it became clear that investors had little appetite for a straight 1:1 swap. The amended terms offered granted an additional $170 in new 2020 bonds for every $1,000 in April bonds, and an additional $220 for each $1,000 in November bonds.

Wanting at least 50% of 2017 bond holders to swap but falling short of target

Under the original terms the PDVSA bond swap offer was only valid if the holders of at least 50% of the April and November bonds agreed to the swap. This was because PDVSA was facing a critical problem with over $11 billion in bond repayments falling due by the end of 2017. In dollar terms the target was to swap at least $5.325 billion of the 2017 notes for new 2020 notes to buy PDVSA and Venezuela time.

On the 24th October 2016 PDVSA announced that creditors holding $2.8 billion of the 2017 bonds have agreed to extend maturities by swapping 2017 debt for new 2020 bonds.  The number of bonds tendered equates to around 39% of the 2017 notes eligible for the swap. This is well short of the intended target of 50%. To complete the exchange PDVSA will issue $3.4 billion in new debt.

Has PDVSA dodged the bullet, or is still staring down the barrel? 

By exchanging 2017 bonds for new debt with annual payments through 2020, PDVSA will reduce bond outlays that would have totalled $3.05 billion by more than $900 million. Whether this is enough to save PDVSA from default remains to be seen. Looking purely at dollars and cents, PDVSA still stares down the barrel of $6.1 billion in principal payments due by the end of 2017. For extra comfort – or if you prefer a “margin of error” – PDVSA, Venezuela (and probably bond holders) need oil prices to rise, and they need them to rise quickly.

PDVSA may have dodged the bullet, but it is still too early to say whether the company has escaped default.

Do ratings matter anymore to PDVSA bond holders?

One of the most interesting facets of the bond swap concerns the position of the rating agencies.

Two of the major rating companies – S&P Global Ratings, and Moody’s Investor Services – announced that they might consider the proposed swap as “distressed” effectively classifying it as a default. There is little evidence that this has had any impact on existing bonds holders or the proposed swap. One reason for this is that PDVSA, at least in terms of bonds, has always been considered “high risk” by investors.

The savviest of bond holders would have seen the writing on the wall once it became clear that the fall in oil prices was likely to be sustained over the medium term. To that extent ratings of PDVSA, or opinions on its credit worthiness have become less important, while return (and the perceived return) on bonds has become king. Risk is still a factor, but the 2020 bond is well secured and the risk are well known.

Why this bond swap comes at a heavy cost to both PDVSA and Venezuela

The great PDVSA bond swap has come at a heavy cost to both PDVSA and Venezuela.

Apart from having to “sweeten the pot” from the terms of the original issue to roughly 1.2 times the face value of the 2017 bonds, and apart from having to extend the deadline four times because investor interest could not be stimulated sufficiently, Venezuela has effectively placed in hoc arguably it most attractive overseas asset – Citgo Petroleum Corp.

While the Oil Minister, Mr. Eulogio Del Pino has touted the swap as a “victory for the Fatherland” this is not necessarily so. Venezuela has bought some time, but there is a still a real possibility that PDVSA will default on its bonds obligations. The story of PDVSA -its persistent repeating nightmare- will therefore continue for some time.

Why the bond swap should be viewed by investors as a positive sign

We shouldn’t close the door on PDVSA, at least for this blog entry, without saying something positive. PDVSA has duly settled the $1 billion 5.125% bond that just matured October 28, 2016. Arguably the bond swap should be viewed by investors as a positive sign if only because the overwhelming signal from Caracas is that Venezuela has not and does not want to default on its obligations at any cost. Willingness to pay is a material factor to be considered by any bond investor and rating agency.

Venezuela – the ship that just keeps sinking

Against the backdrop of the PDVSA bond swap key economic data coming out of Venezuela remains far from pretty. Officially the government maintains exchange controls that sell one US dollar for 10 bolivars (for the importation of priority goods) and 659 bolivars for items deemed less important.

On the Black Market – seen by many as key benchmark indicator of the health of the country as a whole – the bolivar weakened significantly in the week to 31st October 2016 reaching an unofficial rate of 1,501 bolivars per dollar compared with 1,222 bolivars per dollar a week earlier.

Venezuela is sinking but not without hope. Chinese and Russian investments in the oilpatch and  possibly the construction of an LNG plant across the water from Trinidad to be fed by the Dragon field could stabilize the outlook materially. The PDVSA bond swap buys time but other factors need to change and they need to change quickly.

Closing thoughts – time to consider your investing strategies
Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@nullfirstlinesecurities.com or at 868.628.1175, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

 

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