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.

 

29 COMMENTS

  1. I insist, this is going to be the first swap. A second will probably come in 2018-2019 because as you clearly said, they are not changing anything.

  2. Well, it seems like the swap spinned around Option #1 (explained in the previous swap article).

    “#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.”

    Now they (maybe) can avoid default next year…but by butchering the cows. Sigh

  3. 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.

    “Pathetic and infuriating” it may be, but that is unfortunately par for the course for Chavista policy decisions. Why should PDVSA be the exception?

    • What you point out is sad and true, but it doesn’t change that PDVSA should do things right. You’re talking about the world as it is and I’m talking about the world as it ought to be.

  4. Perfectly written Frank, congrats.

    This is yet another instance of the Maduro administration willingly and purposefully putting the interests of big capital ahead of its own citizens.

    I can’t really understand why people seeing the news don’t make the association between the government paying all these billions and bending over backwards to Wall Street, and them not getting any food in their plates and no public services whatsoever, and no reacting like: “What the socialist fuck?”. It really gets me. The MUD should strive to explain this to the common folk. Let’s see what today’s AN session brings in terms of this issue.

    • Thanks for the comment DAUZ!! I definitely agree that the Oppo could step up its communication strategy and explain the link between PDVSA’s woes and the country’s woes, and other things like the link between regressive indirect gas/electricity subsidies and the inflation tax levied to pay for them.

      • Alright so let’s get this straight with regard to this link. So basically the only industry that produces revenues in hard currency and subsidises the whole country has to risk its financial health and sustainability for the sake of subsidies (which are often described by countributors and bloggers of CCS chronicles as not rational)? So let’s risk the only thing that at the moment produces cash for something that doesn’t produce cash.. Hmmmm interesting. Yes the taxpayer is footing the bill but arguing that those $1.1bn. plus interest should be better used towards subsidised food imports is simply irresponsible (regardless of whether people are starving or not). Now we can have a broader discussion on the role that oil and PDVSA should play in Venezuela (which has been raised quite a few times by Amanda) which is a very valid discussion to have and a separate topic, but actually saying this should go to subsidise more food? You are clearly biased because of your political view.

        With regard to team #1 and miscalculation: has anyone in the room ever had a negotiation? It doesn’t look like it as you typically don’t sit in the negotiation table with your best offer in day 1. Sigh

        And finally well, I wouldn’t say that they don’t have any strategy at all. They recently have disclosed new agreements they plan to enter into to boost production. Are they credible? Maybe yes, maybe not. Are they kicking the can down road? Probably. Is everyone else in debt markets kicking the can down the road at this stage? Yes. Does it make sense to kick the can down road? Absolutely. If I were to look at the rest of the oil companies and oil producing industries, I would say that PDVSA has weathered the storm well and is very likely to come out of it. But you can always go buy Petrobras (complete basket case) and listen to what rating agencies with ZERO accountability (those same ones that out AAA ratings on subprime debt, on Greece debt, etc.) have to say. It usually doesn’t end up well and one day you wake up with 70% haircut on your AAA where you allocated most of your capital because hey, it’s AAA right? In the end, it is all about relative value which is what people seem to always miss.

        • The negotiation comment would make sense, if and only if Pdvsa has, 1) more time before 4Q16 maturities, 2) with solid credibility, 3) not using the swap as last chance to kick the can, 4) without declining production, 5) without asking money from Peter today, to pay Paul in four years. There’s a reason why Del Pino had to travel to NYC several times, and why Sanguino said at the AN debate that they had a hard time negotiating because of rejection from the initial offer.

        • Dude, who the hell is talking about food/subsidies…
          Muci is pointing at The Issue in the last paragraph:

          “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.”

          Aside from the 250k b/d deal with oil services providers (that is merely going to try to recover the output lost in 1H16), please tell me what is PDVSA doing here to get its shit together, cuz I dont see it.. The “easing” of the maturity profile is a mirage as debt service in 2017-2020 will still average easily over 8Bn per year, in a country that a long time forgot what the hell is an external balance and has literally no more room to cut imports.

          Imo, the people that’ll get caught in the excitement of the “credit-positive” repricing of venny bonds that’s currently happening will get their hands burned in the months after the swap. PDVSA, Venezuela and global energy credit is NOT fixed by this.

          In the meantime, though, #All-In on the swap..

        • Btw, your argument about subsidies is pointless, since they aren’t doing shit in fixing/eliminating the ones that really matter (gas, public services, food staples) . Sure, you can say that cutting imports leads to reduced subsidies, but its The most socially destructive and fruitless way of doing so.

          • Daniel, I am referring specifically to lines such as:

            “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.”

            This may not be The Issue in question but it is surely used as an argument to pepper the whole piece and provide support to the author’s view.

            With regard with the whole “serious company” discussion is that people seem to have this idealized views of companies and market participants and try to hold PDVSA to standards that in practice are very rarely seen. In fact, let’s start by the fact that the ENTIRE bond market is manipulated by central banks period. What are we talking about here then? Out of $88tn. of bonds out there almost $12tn. are trading at negative yields due to actions from the same “objective and independent” central banks that most here hold as professional and “well-managed” (secretly wishing that perhaps everything would be better if BCV was managed in the same way). Is stripping savers and pensioners from the benefit of capitalisation throughout time not a tax on savers and pensioners too? So when everyone, EVERYONE, is kicking the can down the road, then you find your way to kick the can down the road too (which is what PDVSA is doing). Why all the disappointment with regard to PDVSA’s plan and lack of clarity when pretty much no one in bonds market and governments in the developed world have too much clarity either? It is a pipedream. And again, we can go back to the discussion of: should PDVSA be such an important part of the economy? Why was this allowed to happen? Is this in the best interest of Venezuelans? What needs to be done so that PDVSA benefits most Venezuelans and is not used as a piggy bank? And I am pretty sure the answer to those questions won’t be: stop paying bondholders because we need to subsidise more imports and in fact risk the only thing that produces money to pay for such imports.

            I stand by my view, PDVSA bond holders won’t get burned.

            And yes, they should do more to eliminate all the subsidies in my view but this can’t be done all at the same time. See what has happened in Argentina to Macri which is a good example (after going full blown on liberalisation, he realised that actually the country can’t tolerate such a strong adjustment and needs to slow down).

    • I am an American. I have friends in Venezuela and I have a great empathy for the people of Venezuela. I am doing all I can to ship supplies to your country. My friends are distributing these supplies to an ever expanding group of needy people. It is an overwhelming burden for them and decisions regarding who is most in need of assistance are very stressful.
      I honestly wish that I could do more.
      That said, I would like to suggest a message that the opposition needs to explain to the people of your country regarding the rapidly falling oil production.
      Venezuelan oil wells require continued maintenance to maintain production. PDVSA has not paid the companies that were providing the required maintenance and these companies have stopped maintaining the oil wells. Haliburton is just one example. They are currently owed over 1 Billion US Dollars and as a result have reduced their Venezuelan operations to an skeleton crew.
      The other issue that the opposition needs to explain is that the quickest way out of the hole the government has put your country in is foreign investment. As long as Maduro and his party are in control of Venezuela, there will be no foreign investment. This means that every Dollar that the Venezuelan government gets its hands on will leave the country to buy imported goods. Minus the amount the politicians steal for themselves.
      Venezuela desperately needs to become a producer of everything. From toilet paper to beans to milk. This will only occur when a new government is installed that has the faith and trust of international investors and companies that are willing to invest the capital that is desperately needed to create a manufacturing sector.
      Finally, as the Venezuelan people starve and die from curable conditions, the government refuses aid from many counties and organizations. This is immoral and borders on being a crime against humanity.

  5. The only thing these idiots call “strategy” is that the oil prices go above 100$.

    Remember the imbecilic “GOD WILL PROVIDE” mantra from Mabobo.

  6. I have mixed feelings for this one… no question that the govvy has done a lousy job since its inception, and that then key issues for pdvsa come from a managerial/conflict of interests issue, regarding production, over invoicing, subsidies and many other “stuff”. ..swap conversations began since early this year, and i am not even trying to make sense about why this was not done 8 months ago when prices had plummeted and default seemed like a fact (perhaps because they bought paper at those levels, and just waited it out to sell their positions/take profits 8 months later +40pts higher on some issues?…who knows…yo would need to be the govvy itself to know the answer LOL). .. i do have to say that i am in full disagreements with some of the rating agencies’ rating, statements regarding the swap. It is in this case a liability management issue, and it does improve the credit profile of both curves. .. so why throw nonesense comments when initial swap terms where given ?…now that the terms have improved…are you going to “upgrade” pdvsa to CCC again?….

  7. Im just wondering , how much money is Pdvsa currently borrowing from the financial markets ?, we know the answer: zilch , thus by making these swaps is it really able to receive any more money from the said markets ?? absolutely not …….the net effect of making the swap is that bond holders hold their hand for a while longer and dont attack the Pdvsa supply lifelines that it uses to buy light crude abroad or from attempting to seize whatever money is recieved from sellint part (not all) of its oil exports or from attempting to seize the dwindling heavily mortgaged assets it still owns abroad.. In other words making these swaps dont improve things , they just prevent them from getting worse in the short term at the prize of making them lots worse in the future when Pdvsa runs out of money with which to continue the bond payments and its debt load has grown even more…

    There are many other creditors that arent being paid or if paid are paid only in part and long after their payments fall due , commercial credit is pretty nearly gone too, evidence of this is the big oil service companies withdrawing from operations in venezuela and those tankers moored off Curacao waiting to be paid before unloading their cargoes or Venezuelas joint venture partners not recieving even a bit of the money their companies exports are producing (Pdvsa holding a mayority of shares never never declares dividends which can be distributed to those partners) . If any contrators extends credit to Pdvsa to get hold of some Pdvsa contract its agaisnt the mortgaging of future Venezuelan oil supplies and Pdvsa acceptance of very onerous contract conditions ……..

    Paying with future oil supplies means that increasingly there is no money flow available to meet the operating funding demands of Pdvsa (look what happened with the oil income which now is sacrificed to pay the chinese loans ) or those which the ordinary people of Venezuela need to survive …!!

    I do think that some attempts have been made in the past to structure some kind of planned approach for dealing with Pdvsa mountain of debt but understand that they have been shot down again and again by Maduro and the circle of political bosses that now rule Venezuela ,,,,,,,having to make this swap in the manner which it has been done could have been avoided if earlier effective plans would have been implemented…….but Maduro always said no….the political cost is too big or it discredits us in the face of the world …., Lots of international observers are looking at this swap as a distress operation , distress transactions are those which companies make in the worst possible conditions because beggars cant be choosers and the debtor is against the wall .

    People of my acquiantance who are close to Pdvsa tell me there is no overall strategy for dealing with Pdvsa worsening operational and financial situation , just stop gag emergency efforts to stave off the inmediate problems and see if time is gained for some miracle happens that saves Pdvsa from total ruin,

    There have been many project of the kind now being announced to increase Venezuelan production thru the promise of future oil payments , they have all failed , either they never got of the launching pad or they were abandoned before they bore any fruit . Pdvsa has behind it a mountain of littered projects that couldnt be advanced because of the total lack of organizational or financial resources on the part of Pdvsa or because of the now impossible country conditions ….in any event the production thus bought would only help stem part of the hemorrague of falling production which is now afflicting the countrys oil industry …!!

  8. The biggest problem with the way the government and PDVSA has handled their whole debt issue is that they have waited too long to do anything. Investors have been expecting a default on Venezuelan debt as they have watched Venezuela make every payment.
    The government has been committed to avoiding default while their actions have guaranteed default.
    The time to make an offer to the bondholders was when there were adequate foreign reserves. A comprehensive plan that allowed for continued investment to maintain or increase oil production would have made the bondholders more likely to agree to extended terms.
    Unfortunately foreign reserves are almost depleted and oil production is rapidly declining.
    Economists are talking about when Venezuela collapses, not if Venezuela collapses. This does not create an environment that lenders want to risk their money in.
    The government is hostile to foreign investment, hostile to the Venezuelan people and has an amicable relationship with international drug cartels.
    The near future does not look very bright.

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