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.

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.

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