Say you borrowed $100 from your cousin Tony three years ago and promised to pay him next week. You gave him an IOU and everything. Next week used to seem an eternity away, but now next week is this week, and you don’t have the 100 bucks. So you go up to him and say, “hey Tony, how about we swap? You give me back that IOU for $100 due next week and I’ll give you this shiny new IOU for $150 due two years from now. How about it?” Tony looks you up and down and says “alright, I can go for that,” and you swap IOUs.

Congratulations, you’ve just reprofiled your debt.

For a hard-pressed PDVSA, this reprofiling idea has been floating around for quite some time. We have covered it in the past (Exhibit A, Exhibit B). But it seems to be coming to a head: following the initial pop in bond prices driven by the crescendo of rumors in the market of a swap proposal backed by Rotschild & Co., Eulogio Del Pino openly endorsed the idea, and promises to deliver an ‘attractive offer’ for the tenedores holding the short-end debts.

PDVSA bonds are flying on the rumor-turned-statement and PDVSA 2016/17 bonds are trading at 2016 highs, despite an almost -20% fall in crude oil prices in the last weeks.

Every big Wall Street player has published research reports on the subject; among them, Scotiabank’s Joe Kogan stands out from the crowd, putting the proverbial dedo en la llaga on his abstract:

The problem with a voluntary debt swap is not just that it would increase Venezuela’s total debt outstanding, a debt that Venezuela can never repay under current economic policies. Rather, it would be so costly and wasteful that future governments could even try to repudiate any new bonds issued.

Let’s do a quick recap of the five W’s of the deal.

What?

Rumor has it that PDVSA will be offering a 4-year bond maturing in 2020 (payable starting 2018), with a slightly higher interest rate. PDVSA plans to swap old bonds with a face value of $100 for new bonds with a higher face value, such that both bonds have the same market value on the exchange day (i.e. the same net present value). Market analysts estimate that the required face value for the new bonds ranges from 140$ to 200$, which implies an increase of $3.4 to $8 billion in PDVSA’s financial debt. That’s right, the solution to PDVSA’s debt problem is to pile on more debt.

Who?

As we’ve learned, the holders of short-end PDVSA bonds are dominantly locals, both from the public and private sectors. Venezuelan capital loves to bet that the government will pay its debts no matter what. Since political and economic actors often have a financial stake in PDVSA bonds, a successful exchange is a priority for them.

When?

Del Pino says that it will happen “soon”. Some analysts say it’s a matter of days, others talk of weeks. In any case, the hard deadline is October 28th, when the$1Bn PDVSA 2016 bond issue matures. On the subject, Blanca Vera claimed that the reprofiling effort is still very incipient, with no bank assigned to the deal yet; her source names former Bandes president Temir Porras as the lead advisor to Del Pino on the matter, a deja-vu of the govt’s affair with  Lazard back in 2014.

Where?

The legal jurisdiction for the deal is still undefined. NY law makes the most sense because 2017 bonds, which account for 7/8ths of the debt due in 2016-2017, were issued under it. Credit rating agencies have reiterated that any debt exchange that doesn’t comply with the neutral net-present-value rule is considered a selective default. If the whole point of the exchange is to circumvent the D-word, follows that the government will agree on working with NY law to appease the rating agencies.

Why?

The official stance is that PDVSA has a short-term liquidity problem due to the fall in oil prices, and not a long-term solvency problem. In any case, the liquidity problem is so severe that it’s hampering the company’s ability to sustain production levels, and hurting its long-term viability by a death-circle kind of effect. PDVSA claims that its better for investors to help the company muddle-through these hard years to be handsomely rewarded in the future, when oil recovers and PDVSA returns to its former Petrodollar-printing glory.

What does Scotiabank’s influential analyst Joe Kogan think of all this?


  • The cost of the swap is going to be ridiculous, which defeats its purpose; that is, to help the country stay current on another year of debt payments. There’s little reason to believe that oil prices will rise much higher in the foreseeable future, and it’s becoming evident that PDVSA can’t operate properly and at the same time continue servicing its debts. In other words, there’s no point.
  • The proposed swap will only create bigger problems a year from now. It’s not addressing a way for PDVSA to recover from its recent fall in crude output, it’s not substantially reducing debt service in the medium term, and it’s joined by another kind of swap (+$800mm in commercial to financial debts, relating to service companies like Schlumberger and Halliburton) which would also mature in a few years, meaning the debt service problem is just getting worse on all fronts.
  • The government is doing this swap while knowingly backing off from much-needed structural reforms that can’t be postponed any further. The right thing to do would be a broad-based reprofiling of ALL of PDVSA and Venezuela’s debts (and with a much larger time horizon), giving the company and the Republic the necessary wiggle room to apply deep economic reforms able to generate growth in the medium term. But they’re not going to do that. Instead, Maduro & Co. are playing survivor, just thinking on a way out their shortest-term problems without giving a moment’s thought to the future. It’s not even como vaya viniendo vamos viendo; we are way past that league. The only recent nod in the right direction came from Del Pino and it was quickly shot down by some of that good-old Plan de la Patria bullshit, courtesy of PSUV poster child Elías Jaua.
  • The proposed increase in PDVSA debt is so big and the long-term implications so significant, that the National Assembly has a moral and strategic incentive to block any attempts to pull off the swap, or at least to declare the deal null and void under the Constitution’s Article 312. This would open the opportunity for a hypothetical new opposition-controlled government to repudiate this debt in the future, as they could claim that the proceeds of the deal would be directed to ‘illegitimate purposes’ (paying off the well-informed bachaqueros of Wall St.) with a deal that lacked parliamentary authorization. Y lo peor es que tendrían razón.

PDVSA is trying to kick the can down the road without addressing the structural issues that brought it to the verge of default in the first place. Even if it succeeds, it will be in this position or worse in a year or two. En fin, quieren tapar el sol con un dedo…

22 COMMENTS

  1. “It’s a trap”

    Especially when you consider that a new government could repudiate the debt based on the constitutional argument that the new debt issuance was not approved by the AN. The AN should issue alerts to investors immediately.

    • Yes a new government not influenced by tenedores interests could do that. I don’t think Maduro is holding all the bonds though.

      • Right on the spot. I don’t have “los pelos en la mano”, but it wouldn’t be a shocking surprise to learn that plenty of high level opposition personalities have important amounts of PDVSA and Venezuelan bonds.

        • What’s new about kicking the can down the road? It’s worked so far for the people that matter.

          Meh, stupid, but watch, it could gain 2 years, which in Vene time (carry the half, drop the zero) is forever.

  2. Some wrong statements in the Article
    1) The swap is not for 2 year bonds due in 2020, the swap is indeed for 2024 and 2026 bonds. So moving maturity from 2016 and 2017 to 2024 and 2026. That is 7 and 8 years each

    2) PDVSA already have the funds for PDV2016 , they are workinh in a voluntary swap for both 2017 bonds ( 2017Old and 2017new ) . The PDV2017n already gave 1/3 capital last year, and is due for 1/2 of the remainder in 2106 and 2017 each year

    3) YES the cost is huge. At least 50% additional capital will be given to bondholders that OKd the swap, but take into account that at least 25-30% bonholders are national and private institutions that will accept it Right away and some Hedge funds will accept it also ( another 20% bondholder ) , finally some retails will accept it ( lets say 5% ), not much more.

    At the end around 50% bondholders will accept the swap ( 50% increase in capital x 7 years more cupons ) . So PDVSA needs 25% additional capital to move 50% total debt due 2016 and 2017 for six years….

    Terrible but not out of this world . I think it is ok

  3. “Why?

    The official stance is that PDVSA has a short-term liquidity problem due to the fall in oil prices, and not a long-term solvency problem..”

    Another interesting, informative article. But, again, it fails to mention the main operative word. CORRUPTION. Why is it so hard to write? That the WHY. That’s the reason and the explanation. And the origin of the problems.

    PDVSA is as corrupt as any company can get. More corrupt than Petrobras in Brazil. It’s rotten at all levels. And they are at the root of all other corrupt systems in Vzla, because that’s where the money comes from. Vzla produces nothing else but a little heavy oil. So the massive corruption is channeled through PDVSA. And every honest employee was fired, or left, or was silenced long ago. Most are crooks.

    What do they want? More time to steal more, that’s all. Simple as that. Of course They will not repay their debts, and the MUD will not be able to, either. That’s why not even the crooked Chinese or Russians want to lend more money to Venezuela’s thieves. “Bonds”? Everyone knows Venezuela’s Banco Central is infested with Chavista bandits. If any country lends a cent to Vzla, it’s because they are completely insane, or because there’s some obscure deal under the table, as usual.

    • Juan, I believe you are asking and answering a different question. This post is asking “would it be financially attractive for the current bondholders to accept the proposed swap?” and answering this question from a rational (ie not emotional) point of view.

      • Juan, aka to numerous to mention, has always been answering a different question. See, Muddy Mud, Cubszela, Kleptozuela, millions corrupt, stupid Pueblo, etc. Style has changed a bit along with names, but the song is the same. A We Con You is his only answer.

  4. I would be really surprised if the swap is succesful. To be siccesful it has to offer something better, I dont see a proposal that is any better than available bonds. The 2021 for example, teades around 48% with a 28% yield to maturity. How will they match that?

    Additionally recall that Maduro has the final word and in previous attempts, that word was NO. Little has changed and he still listens to a bunch of different advisors.

    Good article! Needed to be said!

    • Thank you Miguel O! I think there are many ways on which the govt can sweeten a deal enough for some private holders to take it. But ain’t gonna be pretty (thinking on some kind of CITGO guarantee, a pass-through trust or equity stakes..), and it’s gonna be a waste of money for the Republic – although not for the bachaqueros montados en P17s which hold out from the swap, naturally.

  5. If the swap allows PDVSA to breathe for another few years why not? If you can borrow money to buy food to survive another year would you turn it down just because you are worried you can’t pay back the debt in a year’s time?

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