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.

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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.

22 COMMENTS

  1. So will PDVSA use this temporary easement in their payment schedule to bring up oil production or use it to help feed the masses? My guess is neither. There’s just going to be more unaccountable spending.

    • Wrong. They are going to feed the military in order to stay in power a little bit longer, so they can steal what is left. In Venezuela is called “raspar la olla” or “scraping the bottom of the pot” if my translation allows.

  2. “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”

    Jesus.. Oh no, the evil bond holders here they come…Can I remind you many of these bonds were sold in the primary market to many Venezuelans??? What about them? Vultures too?

    It is interesting to see how you just try to justify that somehow it’s ok to make people in financial markets lose money just because they have a particular strategy (let’s not even get into the fact that sometimes managers are managing assets on behalf of small pension funds and insurance companies). Now you are trying to be apologetic of bad practice and defaulters (siiiii queremos bochinche y más bochinche!!!). Great way to boost your credibility, especially given that it may come in handy in the future for the country. Staying current is the only way to steer clear of complete collapse.

    In any case, after one more year the score is clear:
    Mr. Toro and cheerleaders: -100000
    Venny Trader: stopped counting

    Now when is default going to happen? In 2017, in 2018, 2019, 2020, all of the above? Tell me as I would like to do exactly the opposite please.

    Now, time to end the military gasoline racket…. raise prices!!!!

    • If a default is such an extreme impossibility, as you seem to think, then why do rating agencies rate Venezuelan bonds (sovereign and PDVSA) as basically being junk?

      • What you need to understand is Venezuela’s ability to refinance its debt at a decent price, as long as they are able to do it, they will pay. Countries do not pay their debt, they refinance it. That is just what happened with the exchange.

        Venezuela has many cards still to play, like selling assets, raising local gas prices (as VT says), reduce imports (as they have done), control corruption (good luck with that), etc. We have a government that does not give a shit about the welfare of its people, and apparently they will do whatever they need to do to keep on paying even if that results in famine or social unrest or whatever, because they believe that if they default then its game over for them.

        • I understand what you say. But these options are not endless. They already depleted assets via Petrocaribe, International Reserves, overseas refineries, etc. And the market did not buy PDVSA’s speech. Only 39% accepted. What credibility does PDVSA have to keep avoiding a credit event under current circumstances?

          Maybe the swap will help to surf 2017 maturities, maybe not. The thing is that the structural problem did not change. In fact, it’s getting worse in terms of production, corruption and mismanagement. The swap may push the bull a few more miles, but if things do not change (a miracle in oil prices), or if production declines are not stopped, the ability to refinance gets hindered.

    • Dear VT,

      Thank you four raising your point. And thank you for doing it in a way that allows me to extend myself from what was previously written, mentioning another series of relevant facts.

      As per the flows I had the chance to see, in addition to the final results of the exchange proposal, several things were clear.

      1) PDVSA tried to negotiate directly with several funds that have been known in the past for holdoing out of restructuring procedures and introducing lawsuits against sovereign issuers. Obviously, they’re not representative of the entire community of bondholders.

      2) The Venezuelan bondholders in their majority could not take part of the swap, as the requirements to do so did not allow them to participate. I am not making direct reference to them above.

      3) Undoubtedly, PDVSA had to accept an exchange results that, quoting their words, was “susbstantially less than the 50% of the existing notes” (making reference to the outstanding amount of 2017 bonds. If this is not a desperate attempt to save themselves, at the expense of the taxpayer, then tell me what it is. Becuase what it’s primarily at stake here is PDVSA’s morality, besides of the one from potential vultures.

      PDVSA shouldn’t be in this situation under responsible management, and even as the renta petrolera has kept debt service uninterrupted, that does not mean that a credit event may take place under the current administration. Remember, oil production has been falling since 3.3mn in 2005, to less than 2.7 mn currently, as PDVSA’s own numbers.

      This swap may help PDVSA to surf 2017 maturities. In fact, I think they are able to pay. But at what cost? Have you checked PDVSA financials? Have you checked BCV’s balance sheets and international reserves?

      Te debes a ti mismo un mínimo de sentido de responsabilidad chamo.

      You’re not the only bondholder, and moreover you’re not the only “venny trader” in the house. And if you just let the bull guide you forever although numbers get worse by the day, they will bite you eventually. I hope that does not happen, becase default is the worst case scenario.

      Thruth is….do you really think that USD 1.9 billion will save PDVSA if oil prices won’t climb and with decreasing production, corruption and mismanagement within PDVSA itself? La renta cannot save Venezuela forever without structural changes.

      PS: “Mr. Toro and cheerleaders: -100000
      Venny Trader: stopped counting”

      Were you really counting? That’s cute.

      • Javier,

        Thanks for your reply. I was intending to reply to you point by point but it really doesn’t make any sense. Why?

        “Have you checked BCV’s balance sheets and international reserves?”

        Allow me to say you are making the exact same mistake that all the idiotical Wall Street anal-ists. I have made this point here many times before: PDVSA’s bond payments don’t get paid out of international reserves.

        And here it goes again: PDVSA’s bond payments don’t get paid out of international reserves.

        This is a fundamental misunderstanding that a large (very scary) number of people seem to have, probably just because every time Bloomberg (or Yahoo, or el Estímulo or CNN) copy and pastes one of their articles (if they can be called that way), they include their typical paragraphs when they talk about international reserves, bla bla bla. It’s corporate finance and accounting 101. So, I don’t give a damn about international reserves.

        All these doom & gloom forecasters ought to explain what happened with all their forecasts. Didn’t Nouriel Roubini say Venezuela and PDVSA weren’t going to make it after 2014? And all the banks? Didn’t they also profited from selling (over several years) obscurely-priced CDS which implied a 90% of probability over one year?

        I don’t see a lot of people here complaining about many other people kicking the can down the road. Have you looked around you? Petrobras? The U.S. Govt and its debt? The Spanish Govt. and its debt? Etc. The name of the game is kicking the can down the road and managing liabilities. The exchange could have been done under much better terms, yes, probably. However, it is still a very good outcome. What happened when Greece tried that?

        • You are getting it completely wrong. Of course PDVSA debts are not paid by the BCV. Even so, ho provides the BCV with dollars? Guessed it right? PDVSA OF COURSE. And that’s a pretty clesr signal of the cash crunch via numbers. This was a point raised to illustrate that this is not sustainable and unless a real reform is made. But I guess you just read superficially eager to answer selfrighteously

  3. Another very important aspect to consider is the validity of using the ownership of Citgo as collateral for the swap. The attorney’s at ConocoPhillips made an important point in their suit filed in a Delaware court. Citgo has nearly 5 bln in debt of their own and a default by PDVSA would trigger a “change-of-control” clause for current Citgo bondholders, thus making them immediately payable. They get paid first! Read point 61 in its entirety:

    https://www.scribd.com/document/326763294/ConocoPhillips-v-Citgo-PDVSA-USDC-Del-Originating-Complaint-6-November-2016#download&from_embed

  4. How do you know that the Citgo collateral will not be pro-rated? i.e. Offered collateral was for a targeted swap result or, even worse, offered collateral was for a 100% swap rate

    • I think you are understanding this bond. From the offering circular they clearly state that the new bond, no matter the issue size, would be secured by a first lien on Citgo Holding’s equity. What is shared on a pro rata basis is the rights to the collateral among the holders of the new notes (ie. Low participation, Bigger slice for each participant)

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