PDVSA Swap: The Poker Game that Never Should Have Been

Eulogio del Pino tried to do a #TropicalMierda mob impression, but had to accept a swap that fell well short of his goals. In the end, it was Wall Street that made him an offer he couldn’t refuse.

The Swap went through.

On Monday, PDVSA announced it will exchange U.S.$2,799 million worth of of PDVSA 2017s for U.S.$3,367 million of new PDVSA 2020 bonds, secured by 50.1% of CITGO Holding Inc. stock.

That’s not great. Just 39.4% of the initial PDVSA 2017 bonds were kicked down the road out of a combined total of U.S.$7,100 million. The cost? $568 million in new debt — that we don’t see a fresh penny from.

PDVSA had repeatedly threatened to turn the shit-fan on if they didn’t reach a 50% participation threshold for the deal. But beggars can’t be choosers: if 39.4% is what you can get, 39.4% is what you take.

Now PDVSA says its 50% threshold was based on the maximum tender amount of PDVSA 2020 bonds (i.e.: the maximum amount to be issued of these new bonds), which was set at U.S.$5.325 million.

But it means PDVSA’s swap results have as much makeup as a Miss Venezuela in the hands of Osmel Sousa and that Del Pino’s and PDVSA’s strong-arm tactics were a bit of a bluff.

That neat trick allows PDVSA to save face, claiming a 52.6% participation level. But it means PDVSA’s swap results have as much makeup as a Miss Venezuela in the hands of Osmel Sousa and that Del Pino’s and PDVSA’s strong-arm tactics were a bit of a bluff.

Recall that DelPi tucked a horse’s head into Wall Street’s bed sometime last week, good-as-threatening them with default if they didn’t play ball. Some investors seem to have been browbeaten into the swap by that. But the great majority of them were not persuaded at all…

PDVSA’s #TropicalMierda mob impression was no match for Wall Street, a place that could make Vito Corleone piss his pants. Remember, these guys already made several countries kneel, surrender and pay for it — the last of them, Argentina, dragged through a 15 year court ordeal that made “vulture funds” so rich they didn’t even care how reviled they became.

So, why wouldn’t they do the same with a ginormous oil company from a distressed country? I mean, the clue is in the title: they’re called vultures, this what they do for a living.

In the end, it was DelPi who ended up looking at an offer he couldn’t refuse.

Most bondholders decided to free-ride the swap and cash out from the top performing and riskiest bonds in Emerging Markets of 2016 when they expire, while PDVSA had to bow its head and go with it.

What about the forks that took the swap? Well, they may or may not be vultures. What’s for sure is that they now own Wall Street’s #TropicalMierda version of Willy Wonka’s Golden Ticket.

Why?

What started out as a #TropicalMierda bluff could come to be remembered as a #TropicalMierda backdoor privatization.

If PDVSA defaults, holders of PDVSA 2020 will cash before any other PDVSA bond holder by striping PDVSA from 50.1% of CITGO Holding Inc.’s equity. Given the swap’s low participation rate, this CITGO collateral now covers more of  the new PDVSA 2020 bonds. Think about it, the amount of collateral was fixed: if 100% of the old bondholders had gone for it, CITGO would’ve had to stretch to cover them all.

But since just under 40% participated, each participant gets two and a half times as much collateral cover. What started out as a #TropicalMierda bluff could come to be remembered as a #TropicalMierda backdoor privatization.

What did PDVSA accomplish?

For starters, by tendering of 39.4% of PDVSA 2017 bonds and issuing the new PDVSA 2020 bonds it will save up to U.S.$1,958 million in capital payments for the next 12 months, in net terms.

For that privilege, it adds U.S.$2,526 million in capital payments between 2018 and 2020. Net-net, we’re talking about U.S.$568 million in new principal. That’s new debt before counting all the extra interests and the fact that more than half of CITGO Holding Inc. is now on the line if PDVSA defaults.

Will this help PDVSA to avoid default next year at least?

Of course they’re happy: if you’d just put your hands in the collective pocket of 30 million desperate people and walked off with $568 million, you’d be happy too.

So far, the market reaction has been very positive to the swap results. Free-riders were happy, participants were happy too, and other PDVSA and Venny bondholders took a momentary breather.

Of course they’re happy: if you’d just put your hands in the collective pocket of 30 million desperate people and walked off with $568 million, you’d be happy too.

In the end, DelPi saved his ass, for now. PDVSA will probably end up wading through another of these liability management shenanigans soon enough to surf 2017 debt service and be safer for the next years, given that results from the swap offer were not that encouraging. I bet we’ll see him knocking Wall Street doors again soon.

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