PDVSA Swaps the Swap

Realizing its original swap was about to flop, PDVSA comes back with an offer that will leave Wall Street around a billion dollars richer, and you exactly the same amount poorer.

Last night, while the world watched everyone’s drunk, racist uncle rant,  PDVSA sweetened its offer to swap 8.5% PDVSA 17New and 5.25% PDVSA 17Old bonds for new bonds secured by 51% of Citgo’s common stock, payable over four years in 2017-2020.

It’s an idiotic and irresponsible non-strategy.

At first, the ratio was 1:1 — for every dollar worth of old bonds you’d get a dollar worth of the new bonds. As we expected, that wasn’t good enough to tempt many bondholders. So they’re now being offered 1.22:1 in new bonds for every PDVSA 17N they trade in and 1.17:1 in new bonds for every PDVSA 17O they trade in, provided they opt in before the new October 6th deadline. After the deadline, the exchange ratio declines to 1.17 and 1.12, respectively.

A maximum of $5.325 billion in old bonds will be swapped.

Bottom line: you, the taxpayer, get screwed.

  1. The new swap, if successful, will create up to $1.11 billion dollars (+ the interest) in new debt for the state to shoulder. That means up to $1.11 billion fewer dollars for food imports, for hospitals, for schools, and for medicines. And PDVSA doesn’t even get any fresh cash for the benefit of burdening itself like this.
  2. Since the new bonds are secured by 51% of CITGO, it also means that if the swap goes through and PDVSA doesn’t pay in time, you the taxpayer lose ownership of CITGO.
  3. The increased exchange ratio gives credit-rating agencies another reason to deem this swap, if successful, a “distressed exchange”, which will trigger a credit-rating downgrade to “selective default”, and close the country off from capital markets even more. To be clear: a “selective default” rating wouldn’t trigger actual default – credit-rating agencies would just bring us down another notch on the ratings totem pole.

You might argue that the swap is the lesser of two evils, that not swapping would carry a higher cost. That may be true. It may be false. But it’s beside the point.

PDVSA isn’t even pretending to get its shit together.

What’s really at issue here is that PDVSA’s management insists on kicking the can down the road —at an increasingly high cost— with no strategy to get out of the financial and operational hole it’s in except burning assets and praying for higher oil prices.

It’s an idiotic and irresponsible non-strategy.

With PDVSA’s production in free fall, virtually out of cash cash but having to import light crudes from, of all places, the bloody USA; with large bond payments looming; it still waits until the last goddamn moment to offer the sawp? Is it any surprise it ends up backed into a corner? Bondholders have all the leverage and PDVSA has none.

Unless PDVSA offered an extremely generous swap for bondholders at an onerous cost to itself —which is precisely what this swapped-swap does— bondholders simply wouldn’t take the deal and risk weathering PDVSA and Venezuela’s turbulence for another 4 years until 2020.

A serious company would have, upon announcing the swap offer, announced an ambitious, credible, and binding plan to restructure its operations, lower costs, increase production, and in a word, get it’s shit together. PDVSA isn’t even pretending to do this.

It’s pathetic and infuriating.


Frank Muci

Frank is a public policy and development researcher in Cambridge, MA.