Pdv22: The Phantom Menace

PDVSA will probably have to pay three times what it will get for a murky operation that has analysts befuddled. To the Venezuelan government, this all makes perfect sense.

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The Venezuelan debt situation just got weirder, thanks to the sudden appearance of a 2-year-old PDVSA bond that few people knew very little about, priced at basement prices.

After doing some major spelunking on the history of the note, our hypothesis is this: it looks like the bond was never meant to be sold in the open markets, but given the government’s desperation, it might be sold to raise dollars, while increasing the burden on PDVSA.

Bloomberg reported this week on the appearance in markets of a $3 billion “mistery bond” issued by PDVSA in 2014, with a 2022 maturity date. These bonds, says Bloomberg, “don’t trade on any U.S. exchange, aren’t rated by any major credit-ratings firm and no term sheet has been made public”, a daring display of financial clumsiness that’s unprecedented in the history of the state oil company.

Bond traders worldwide – already doubtful of Venezuela’s capacity to avoid a default – were freaked out by this phantom note, since no one knows what the government will do with it, or when, or how.

PDVSA would have to make payments to its new owners, in dollars. Those additional payment obligations in dollars would be news, to everyone. Probably even to PDVSA’s finance department.

Some more digging around revealed that this 2022 PDVSA bond didn’t appear completely out of the blue. It was first mentioned in a footnote on PDVSA’s 2014 financial statements (Page 65), and it was brought up again in a thorough report on Venezuelan debt published by JP Morgan exactly one year ago (Pages 7 and 19).

The bond had been largely ignored by the Venny-trading community until last week, when the so-called Pdv22 news started to trickle indicative prices on Bloomberg screens, without any previous notice from the issuer.

So although this is not a new liability for PDVSA, given the way it was first structured, no one thought the company might have to pay any actual dollars for it. Reading the note on PDVSA’s statements, it’s quite clear the company took on a dollar-denominated debt, but didn’t receive one dollar in exchange.

The operation was quite convoluted, and involved three parties – PDVSA, the Central Bank and the state-owned Banco de Venezuela:

“El 16 de octubre de 2014, la Compañía emitió a favor del Banco de Venezuela, S.A., Banco Universal (Banco de Venezuela) un certificado de inversión denominado en dólares por $2.400 millones (Bs.49.968 millones), con vencimiento el 30 de diciembre de 2014 y con intereses pagaderos al vencimiento. El 28 de octubre de 2014, se realizó la redención anticipada del certificado de inversión, el cual había sido cedido por el Banco de Venezuela al BCV, como parte de pago por la colocación privada el 28 de octubre de 2014, de bonos PDVSA 2022 por $3.000 millones (Bs.62.460 millones), adjudicada en su totalidad al BCV a su valor par. Al 31 de diciembre de 2014, el BCV adeuda a PDVSA el saldo restante de la emisión de los bonos.”

What we can gather from that almost unintelligible accounting doublespeak is that in October 2014, Banco de Venezuela bought at least $2.4 billion worth of that bond at full value. In return, PDVSA obtained only bolivars. Not one dollar changed hands. The underlying motive is hard to pin down: it could have been designed to circumvent laws that prohibit the Central Bank from financing the government, or it was just a ruse to improve the balance sheet of Banco de Venezuela.

The bond is most likely being held now by the Central Bank, but again, it’s difficult to know. This is important, because as long as it’s held by a public entity, the government can engineer another transaction to erase the debt from PDVSA’s books without the company paying one dollar in cash.

The only limit to their trickery is their imagination.

But if and when that bond is sold to a private investor, PDVSA would have to make payments to its new owners, in dollars. Those additional payment obligations in dollars would be news, to everyone. Probably even to PDVSA’s finance department.

As of yesterday, the bond was priced below 30 cents on the dollar. If the whole bond issue is sold at those prices, the Central Bank would receive about one billion dollars to shore up foreign reserves. PDVSA gets nothing, and would be on the hook for $3 billion.

Ouch.

These bonds might be sold at some point during 2016 as a frenzied way to acquire much-needed dollars. Analyst speculations point to two potential uses: paying off way-overdue dollar obligations to importers, and as a source of dollar supply for the DICOM currency system.

It would be another example of this government’s frantic financial carelessness: saddling PDVSA with $3 billion in payments, in exchange for $1 billion in return.

19 COMMENTS

  1. I really dont understand what the “mystery” is about, execept that that was the word used . The issuing of this bond was in PDVSA’s Jnauary 2015 and 2016 debt statements, it was reported by the press, it was reported by Bloomberg on January 28th. 2015, it was in the Bloomberg database since Jan. 2015 and it was reported in Venezuela’s newspapers. So, there was nothing “mysterious” about it if you paid attention. What happened was that as prices collapsed (PDVSA 22 went from around 70% when the bond was issued to 40 on Dic. 16th. 2014 two months later) the BCV did not want to sell the bonds in SITME, which is what it was supposed to be used for. I guess now there is a bit of desperation for dollars and it is ok.

    I think that those that were surprised by the existence bond should be embarrassed to say publicly that they were. If you invest in PDVSA bonds should read carefully the debt report issued every January, had this bond not been issued, PDVSA’s total would have gone down an additional US$ 3 billion in the January 2015 report, which makes a difference. If you invest in PDVSA and Venezuela and don’t pay attention, then those investors are being sloppy, as simple as that. Maybe the headline should have been: “Market of amateurs surprised their own sloppiness in the existence of a bond that was there all along”

  2. Agreed. This bond has been sitting in PDVSA’s books since 2014. I think the only “news” is that it might have to make payments on it to private investors. As long as the BCV holds this bond, they can think of another way to make it disappear.

  3. Bloomberg news on Jan. 27th. 2015, byline by Pietro Pitts:

    PDVSA says it sold $3 billion of dollar bonds due in 2022 to the country’s central bank in private placement on Oct. 28, according to co. report published on its website.

    -Bonds have coupon of 6%
    -PDVSA used fx rate of 18.08 bolivars/USD to calculate debt operations in 2014
    -PDVSA’s total debt rose to US$ 46.2 billion in 2014 vs. 43.4 b in 2013

    other notes…

    • Its very likely from reading the above that the bonds where used by Pdvsa to pay BCV part of the many loans which it has received from that Bank throughout the years , The BCV could just keep the bonds in their vaults or sell them on the market , evidently the timing would depend on the market value of the Bonds at the time they were placed in the market , this is not a very good time to sell them so the fact that they have started selling them is a sign that they are REALLY desperate for US currency whatever the loss involved in such operation .

      Understand the market has responded to the appearance of these bonds by punishing the value of all Pdvsa bonds out there since its a sign that Pdvsa´s debts are mounting ……and mounting more than expected …….!!

  4. With 1.8 billion dollars of interest payments due in the April/May time frame, it would appear likely that PDV22 will be sold for hard currency soon, …very soon.

  5. Here is the backstory for the reason for the confusion. Bloomberg has become the repository for most of the world’s bond data but until last month, it did not have this $3 billion PDVSA 6% of 2022 bond in its data system.

    That meant that most banks and trading desks did not know of its existence and didn’t have it in their calculations of Venezuela and PDVSA dollar debt.

    What happened was that an eagle-eyed Bloomberg reporter — Christine Jenkins in Bloomberg’s Bogota bureau — was looking at one of our Latinvest Reports that calculates bond interest per month for Venezuela and PDVSA (available here: https://www.scribd.com/doc/286044491/Latinvest-Venezuela-Report-Bond-Debts-20-October-2015 ) and couldn’t find the PDVSA 6% of 2022 bond in the Bloomberg data system. Bloomberg came back to us to challenge its existence and we gave them the ISIN (the international security identification number) showing that it was registered in Euroclear to trade internationally and Bloomberg quietly remedied the omission to the surprise of many Wall Street firms who had been undercounting PDVSA’s outstanding debt.

      • Actually, Rodrigo, it would be logical to think so, but the NEWS side of Bloomberg is separate from the DATA side of Bloomberg, so though Pietro Pitts reported the news briefly for Bloomberg in January of 2015 on the editorial side (as did our team at LAHT.com), it was not included in the database side of Bloomberg because Venezuela and its investment bankers are increasingly not forthcoming with the information. Bloomberg, for example, still does not have the Prospectus on the PDVSA 6% issue, nor even the prospectus on the $1.5 billion Citgo Holdings bond issued last year, nor the $650 million Citgo bond issued in 2014 (both are in the LAHT database, however, if you need them).

        • Well, I have seen it in that database since last year, that is how I discovered it existed it, I was adding PDVSA’s debt and used Bloomberg’s PDVSA page going bond by bond and found the 6% 2022 bond. This was first quarter of last year. That there is no Prospectus says nothing of that fact. I have talked to others that has been it and moctavo above also says it.

          • Hi, Rodrigo, I hope this confirmation from Bloomberg that the bond was only added into the system last month on February 4 helps clears up any misconceptions. If you have access to a terminal (I don’t find the name Rodrigo Sanchez among the users listed with terminals or I would have sent you this message directly), you can verify these facts by asking the help desk yourself or by referring to this query H#677149559.

            23:10:20 RUSS DALLEN : I would like to know what date ISIN xs1126891685 was added to the bloomberg database and where i can find that type of information in the future?
            23:10:21 HELP DESK : Thank you for using Bloomberg HELP!
            23:10:46 BLOOMBERG HELP DESK : Hello Russ, this is Shawn Poh from the Bloomberg Helpdesk.
            23:11:08 RUSS DALLEN : Hello shawn
            23:12:35 BLOOMBERG HELP DESK : Checking bear with.
            23:13:23 BLOOMBERG HELP DESK : Hi Russ this security was added on 02/04/2016 but unfortunately this is something that only Bloomberg can check.
            23:13:49 RUSS DALLEN : Ok thanks
            23:15:25 BLOOMBERG HELP DESK : Most welcome and have a good upcoming weekend. Should you have any further questions, kindly hit the key twice and please quote H#677149559 and I’ll be glad to follow up with you on this.

  6. Keep them coming. These news are great to make some $$$! However, what a poor journalistic job by Bloomberg and the classic i-bank Anal-ists. Perhaps they were targeting a bit of sensationalism. However, they never seize to amaze me…This is the classic zero accountability policy from journalists, anals, financial “gurus” at play…Will the “journalists” publish an amendment at least? Does Bloomberg even keep track of what their own anal-s write?

  7. The Bonds were issued but not traded , they had only one holder , the BCV who just sat on them so their existence remained below the radar of the markets awareness!! , Pdvsa has many other large liabilities with the BCV and many other third parties , this doesnt really change Pdvsa’s financial predicament because the Bonds were apparently issued to ‘pay’ BCV prexisting liabilities , except that these Bonds add to those already existing in the financial markets……, thats why they have an impact on the value of other Bonds outstanding.!!

    The real story is not their sudden ‘appearance’ in the radar but the fact that at this very awful time to start trading them the BCV has decided to do so, because it clearly signals how desperate Venezuelas financial situation is that the BCV is willing to take the big hit that trading them at this time involves……..!!

    This is more a signal of impending default than anything else.!!

  8. I think you guys are all missing the point of this piece. It’s not so much about who saw the bond first and when it got reported, it’s about the prodigious Inception-worthy-several-layers-deep-GUISO between PDVSA, BCV and Banco de Venezuela that is underlying, and of which I’m sure we’ve only scratched the surface…

    • Banco de Venezuela is simply a passive vehicle to the transactions which the BCV and Pdvsa decide to transact . They are not autonomous in what they do.

      Otherwise I believe you are right that behind this initial bond transaction there must have been some accounting gimmickry which BCV needed to carry out probably to make its books look better …..

      Cant see how Pdvsa gained by it. the routine system for Pdvsa to borrow from the BCV is simply to sign an IOU , to transform those IOU´s into a Bond issue is something that made things more difficult for them so one must hazard the guess that it was something imposed by the BCV for reasons of its own .

      Still I insist that the really interesting thing about these bonds appearing on the market is that for the BCV to sell them with the deep deep discounts that the market now impose, means that they are really really very short of forex . so much so that they will willingly incur in the loss which the sale of these bonds currently entails..

  9. The definitive word on the subject is to be found in the highly detailed review of the subject in the Devils Excrement ……….usually the best informed source on oil finances ……

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