PDVSA #SwapeameEsta

After recovering from the shock of seeing PDVSA make the biggest financial announcement of the year on Facebook (yes, they did), we regroup and take a close look at The Swap™.

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On Friday, PDVSA offered a voluntary bond swap aimed at reducing its 2016-2017 debt payments. Instead of paying back the bonds that mature next year, PDVSA offers to pay back the capital (plus a bit of extra interest) in four cómodas cuotas (amortization payments) between 2017 and 2020.

If bondholders were looking for a pile of easy money at the end of this rainbow, they’ll have been disappointed. The terms aren’t very favorable from their point of view. We’re guessing plenty of bondholders are looking through Facebook and just itching to flick PDVSA the finger in comments.

Here’s the deal. Say you hold one of PDVSA’s two bonds that mature in 2017 – one in April 2017 and the other in November  (ojo, the November 2017 one also has a capital payment in November this year). PDVSA is offering to trade you those old bonds for a shiny new bond maturing in 2020. This new 2020 bond will be issued only for PDVSA to swap for its two 2017 bonds; not to get fresh cash.


A 1:1 ratio is just not that attractive.

The Swap ratio is 1:1. You give PDVSA $100 worth of any PDVSA 2017 bond and they give you $100 worth of the new PDVSA 2020 bond.

That means the total amount PDVSA owes won’t increase. (OK, when you get deep into the weeds you find this isn’t strictly true — interests are higher with the new bond. The ratings agencies would’ve thrown a shitfit if the net present value of the new bond wasn’t at least a little higher than the old one. Still: PDVSA’s total liabilities won’t increase much.)

So, are lots of private bondholders going to rush to get in on this deal?

Nobody seems to think so.

A 1:1 ratio is just not that attractive. PDVSA is basically just asking for more time. They’re asking bondholders to stick it out with them over what look to be three highly turbulent additional years. Years when Venezuela is very likely to witness massive political upheaval, where the basic rules of the economic game are up for grabs. And they’re not even going through the motions of promising to reform the chaotic way PDVSA is managed, or the economy.


Instead of extra money, PDVSA is offering 50.1% of Citgo Holding Inc.’s Common stock as collateral.

You’d have to offer a pretty big dollar premium to tempt bondholders to go for a deal like this. But they didn’t. Early conclusion: relatively few bondholders are going to go for it.  

Instead of extra money, PDVSA is offering 50.1% of Citgo Holding Inc.’s common stock as collateral. That’s pretty thin gruel: who’s to say PDVSA won’t strip out all the assets from Citgo ahead of a 2020 default? Or saddle the company with so much debt that the equity guarantee becomes basically worthless? This weekend any number of bond analysts will be looking closely at the fine print of the Swap prospectus to try to figure out the gory details. But on a first approach, the Citgo collateral doesn’t look that great.

For one thing, Citgo itself is probably not worth more than about $6 or $7 billion, which makes 50.1% of Citgo worth maybe $3-$3.5 billion…not a great guarantee for a $7 billion bond. And that’s what Citgo is worth now: what matters is what it’ll be worth in 2020.

On the other hand, the new PDVSA 2020 will be the only Venezuela or PDVSA bond with any kind of collateral. So while the guarantee isn’t great, some investors may still reason that something is better than nothing.


From bondholders’ point of view, it’s a bit of a prisoner’s dilemma.  

The details are, well, detailed, but the big picture is that this isn’t some kind of wild giveaway to Wall Street.

That’s good from a Salvaguarda point of view: we were worried that Swap terms were going to be terrible for the Venezuelan taxpayer, and they aren’t. The flip side is that since it isn’t a piñata for foreign capital, relatively few foreign capitalists are likely to go for it.

From bondholders’ point of view, it’s a bit of a prisoner’s dilemma: each one of them would be best served if all the other bondholders took the deal, but not them.  Of course, if all of them think this way, nobody takes the deal. There’s a non-negligible risk the whole offer just bombs. Alternatively, maybe PDVSA doesn’t need that many bondholders to go for it to score the deal a success.

Basically, one of two things is happening here.

Either,

#1. PDVSA is miscalculating. The government doesn’t want to open itself up to political attack for fattening up PDVSA’s debt, so they’re gambling but gambling really badly. They’re thinking the Citgo collateral offer is going to be attractive enough to lure a significant number of bondholders into swapping, but they’re wrong. In this scenario, PDVSA wants to eat steak but it doesn’t want to butcher the cows: that’s why they left it to the very last minute, that’s why we got that mamarrachada of a swap announcement on Facebook. Mamarracho is as mamarracho does. In this view, the bondholders will turn their noses up at the offer, and PDVSA is going to be screwed, unable to meet its payments this year or next.  

or,

#2. PDVSA isn’t that deep in the hole. Having already bought back quite a lot of their own bonds, they just need a little bit of help making up the remaining 2016 and 2017 shortfall. So they decided “well, screw the forks, no sense giving them a plump deal: we only need a couple of fish to bite.” That’s why they purposefully put together a not-very-attractive swap offer, calculating a few bondholders will go for it, and that that’s enough.

So which one is it? #1 or #2? It’s too early to tell, and the Caracas Chronicles team is frankly divided.

On the one hand, chavismo miscalculates so often about so many things, it’s always dicey to think just this once they’re making a cunning strategic move. It’s easy enough to imagine some chavista politician pigheadedly insisting that The Swap™ is going to be a hit, just because, even though all the experts keep telling them the conditions clearly don’t warrant it. And the conditions clearly do not warrant thinking The Swap™ is going to have a lot of buy-in. Which is why some members of the team are adamant it has to be #1.

On the other hand, the information asymmetry here is profound: PDVSA’s finances are really opaque, the company knows much more about its situation than we do, just because they never publish anything. They have tons of expensive advisors, and it’s hard to believe they could run with an offer like this genuinely not realizing that it wouldn’t serve their goals. Which is why some members of the Caracas Chronicles Team are committed #2ists.

So, which one is it?

We’ll find out soon enough.

25 COMMENTS

  1. For sure its not # 2, Pdvsa is really short of money , not just to pay its debts but simply to continue operations at a minimum ……, and you’re right that Citgo isnt that great a bonus , it owes a lot of money , the attempts to sell it resulted in pathetic offers ( less than you estimated it to be worth ) , it relies on being supplied Venezuelan oil to optimize its profits (which may not be forthcoming if the production continues to deteriorate) and there are going to be other creditors with their own demands …..!!

    Generally bond holders or bankers are only interested in companies which are big on cash flow which they can offer on sale for enough money to get paid what their owed , thats definitely not Citgo.

    So where’s the beef, Maybe a group of bond holders have no appetite for pulling the plug at this time , it will be very messy , Pdvsa is pretty nearly untouchable inside Venezuela , and if your are going to lose most of your money anyway you might as well get some juicy coupons for a couple of more years and see if things somehow improve in the interval …….!!

    I figure that on launching the swap offer they ve already contacted and gotten an ok from an important group of holders (who have a good idea of what is getting offered) , Pdvsa has the capacity to pay part of its debt and what it must be seeking is simply to get enough bond holders to accept the swap so they can get through this year and part of the next by minimizing the amount payable in that period .

    Its good to remember that the bond holders arent the only people owed money , there are a lot of banks and financial agencies (including some chinese) , people who are trying to collect on arbitrarion awards made against the Republic and who might play a game of arguing that since they are not getting paid they have to get hold of Pdvsa assets before they are all lost (Pdvsa being owned 100% by the Republic) which legally is dicey but they have little to lose from being aggresive…!!

    All they will do is kick the can one or two years down the road ( if they are lucky) and its just part of a game that can only end in disaster unless something really radical is done in the way the country and Pdvsa are run !!

    • @ Bill: Regarding Citgo, they are in the process of purchasing the mothballed Valero refinery in Aruba. They estimate it will cost over $1 Billion to get it back running again as another upgrader. Where the heck will that money come from?

  2. It would be nice if one of the investment banks that have profited so handsomely from the bond issues etc agrees to underwrite the whole swap and thereby remove the risk of the deal failing!

  3. Interesante los comentarios de Bill Bass, Veo este Swap como una manera de reducir un poco la presión sobre los pagos de deuda para el 2017, y de paso vender unas acciones de Citgo a precio de gallina Gorda (valoran en 7.200 MM$ el 50% de Citgo, según precio actual de los bonos en canje ). cabe recordar, el intento fallido de venta de Citgo en años anteriores valorandola en 10.000 MM$. Una apuesta ganar-ganar solo para PDVSA y el gobierno, los demás que se jodan. Quieren vender espejitos a precio de oro. La única ganancia sería los que cambian bonos del 5.25% por unos que pagan cupon de 8,5% pero a costa de someterse a un riesgo más elevado. Tambien hay que tomar en consideración que Citgo hizo una emisión de bonos por 2.000 MM$ y que deben tomar en cuenta en los balances para la valoracion de la misma.

    Es como si quisieran hacer una oferta pública de acciones, sin pasar por los tramites de la Fed para este tipo de emisiones. Al saber que no pueden vender la totalidad de Citgo, por lo menos reducen exposición en esta operación. Dependiendo de las resultas de la misma, en un futuro volveran hacer lo mismo con otros bonos y al final salen de Citgo.

    Interesante destacar que para el 2017 corresponden pagos solo por amortizacion de bonos de un total de 9150 MM$ sin incluir intereses en estas dos emisiones.

    • We do all miss Miguel at times like this. The latest I’ve heard is that he’s making some progress after his accident. Slow, though: he was seriously hurt, and it recovery will not happen quickly.

  4. I am an American with a keen interest in the suffering the Venezuelan people are currently enduring
    I have followed the bond situation and read the analysts comments. One comment that opened my eyes is that Wall St. has expected a default on the PDVSA bonds for a long time.
    The government has depleted the foreign reserves to a negligible amount for a country your size. This has put Venezuela in the precarious position of running out of money. A default will lock Venezuela out of the international bond markets.
    The analysts expected a default while Venezuela had more foreign reserves to help it weather the storm. Creditors can be relentless. They will act to seize oil or ships when they are in foreign ports.
    At the same time, Venezuelan oil production is declining. Oil well servicing is no longer being done by Haliburton. Haliburton is owed over One Billion US Dollars for service performed on behalf of PDVSA. Without this ongoing maintenance, oil production is going to keep declining at an accelerating rate.
    Nobody seems to know what will happen once the foreign reserves are depleted. I expect that without money to pay the military, Maduro will allow them to steal from the people. Venezuelan law makes it illegal to send currency to your country. This is the exact opposite of what should be happening. Mexico has Billions of US Dollars pumped into the economy every year from workers in the US sending money home. Any way that Dollars can find their way into the economy would be a net benefit for the people of Venezuela.
    If Maduro does not allow foreign aid into Venezuela the humanitarian crisis is going to get much worse. There will be no money for imports. I have been shipping food and basic supplies to Venezuela through a freight forwarder in Miami. He recently informed me that since the Army seized the ports. 20% of the shipments are disappearing.
    MUD has attempted to peacefully and lawfully deal with a criminal government. It is beginning to look like there will be no peaceful solution.
    My prayers are with the people of Venezuela. Feel free to contact me if there is any way that I can help.

  5. Some things missing in the analisys
    1) 2017 Bonds are heavily owned by government through differents pension funds and savings instruments. Some figures talk about 35-40% owned by them
    2) some Big Hedge Funds that has been said have near 20-25% of those bonds were involved and they will OK the swap
    3) The swap is NOT for retail , a lot of those bonds are in hands of retail investors in Venezuela who bought them in initial offering and just sit down receiving their cupon. They will do nothing and that is about 25% of bonds

    So basically this swap has 45-55% bond holders on agreeement, 25% that will do nothing ( minor retail investors ) and the rest maybe 5% will go for it

    I think that at the end is good for PDVSA who get time and easy their payments in the 2017 year

    • Well, this is just a restatement of View #2 (c.f., Having already bought back quite a lot of their own bonds, they just need a little bit of help making up the remaining 2016 and 2017 shortfall.)

    • Having bought back their own bonds, the swap means that it is effectively the mechanism for them to close the loop on the buyback operation at even better terms than initially envisaged. They have been pretty clear the intend to keep paying, therefore, presumably they have bought back enough for the swap to work only if PDVSA participates. As per Eulogio and released by Bloomberg this morning:

      “Venezuela is prepared to meet its debt obligations if recent swap offer is declined by bond holders, Oil Minister Eulogio Del Pino said in an emailed statement”.

      In addition, it is not uncommon in the world of finance to already have some soft commitments before the actual offer announcement takes place so I agree with Bill Bass in that they probably had some positive indication from private groups.

  6. Something about the math needs sprucing …..If 20 to 25% of Big hedge bond holders have ok’d the swap then its going to be more than 5% of the total holders who will take the swap, presumably those held by venezuelan govt related institutions will also take it so the percentage of bond holders accepting the swap holders will be large, reducing the amount of actual payments to be made during the period some 60% or more……..!! Now there will be more money for Pdvsa to pay its other creditors (those owed loans rather than Bond amounts or commercial debt ) ….

  7. Latest update from Torino Capital:

    “(…) We believe that the government is targeting reasonable participation levels and therefore believes that the value of the collateral represents a sufficiently attractive inducement for bondholders. Our calculations above, however, suggest that it may have miscalculated, as a 1-to-1 inducement is likely to be less than what is necessary to convince a large share of bondholders. If PDVSA observes a low rate of participation at the outset, we believe it may decide to adjust the exchange ratio upwards over time, introducing an incentive for bondholders to wait until the terms of the offer are improved.”

    • All very logical. Insider/individual smaller holdings may assure the 50% approval needed, if not, then an inducement sweetener may do so. But, the deal still stinks, as per RD recent comments, since heavily-encumbered CITGO isn’t worth much, either dead, or alive….

  8. Bajo estos terminos y condiciones, el swap no va.

    Vamos a ver que tanto cash tienen para pagar a medida que le vayan poniendo carne al hueso que le quieren dar a la gente… es decir, pasaremos de 1-1 a 1-1.1, a 1-1.15 y asi hasta que lleguen al sweet spot donde la gente no puede resistir mas la tentacion y se peleen por agarrar su hueso y prender una vela para que suban los precios del petroleo y que los “managers” de pdvsa/vzla sean al menos un poco “pragmaticos”.

    Mi prediccion: El swap se hará de aqui a abril y no va a ser el ultimo que hagan porque no creo que los precios suban ni que los managers mejoren.

  9. Menawhile:

    S&P – Petroleos de Venezuela Downgraded To ‘CC’ From ‘CCC’ Following Exchange Offer Announcement; Outlook Remains Negative

  10. Curacao governor just announced that negotiations to renew rental of Curacao refinery with Pdvsa had been unsuccessful and that as a result Refinery would be rented to a Chinese Company ….Curacao refinery positioned Pdvsa perfectly to supply oil demand in the Caribbean and Central America , once a valued market now forever lost …!! Also lost in previous years were Pdvsa joint ventures in Ruhr Oel ( Germany) , two joint ventures in the US (one very important one with Exxon), two Citgo owned asphalt refineries in the USEC , A very large refinery (Hovensa) in the Virgin Islands . To be expected is the loss of the Citgo marketing and refining network in a couple of years time ( if not earlier)…..!!

    These offshore investments were made strategically to ensure that whenever markets made the placing of our oil possible difficult or impossible because of outside competition we could always count on a sure market to sell our oil . The whole strategy is now close to total ruin …… Just think, if Curacao terminals can no longer be used to bring in the light crude cargoes and distillates needed to blend with our heavy faja crude ( our terminals aren’t as good as those in Curacao) then how are we going to continue our heavy crude exports??

    The implications are worrisome.!!

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