The End of the Kiting Strategy

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Kiting is the oldest trick in the book for distressed credit card holders. Got a big balance you can’t pay off? Get a second credit card and use it to pay for the first one. Done skillfully enough and aggressively enough, this is a trick you can keep up for a long, long time.

If DTC couldn’t get the Executive Order straight, what hope is there for us mortals?

Credit card kiting is at the core of the government’s financial liability management in recent years. But the Trump administration’s decided to try to put an end to it. Or, at least, to say if you’re going to kite, the credit cards can’t be American.

Executive Order # 13808 is a complex beast. Its structure is peculiar: first it bans a very long list of financial transactions between Venezuelan state entities and U.S. individuals and, directly afterwards, it creates a long list of exemptions that, in-effect, unbans many of the things it had banned at the start.

Confused? You’re not the only one. This past week, Depository Trust Company, one of the biggest financial clearinghouses out there, first suspended service for 35 Venezuelan securities and then reversed itself, unbanning 29 of them, adding to the confusion in the financial world with regards to what can be traded and what can’t. If DTC with its army of securities lawyers couldn’t get the Executive Order straight, what hope is there for us mortals?

The real risk —or is it the intention?— is that these sanctions will push Venezuela and/or PDVSA into default.

Venezuela will have to look hard and far to raise funds to make debt payments due this year —maturities scheduled for October alone amount to US$3.63 billion — and the next (and the next, and the next). While this government is accustomed to seeking financing from sources like China and Russia to make payments, before the sanctions it could rely on the US financial system to facilitate those transactions. It will now have to use other platforms to secure monies to pay down debt.

But what’s really at stake here?

Venezuela will have to look hard and far to raise funds to make debt payments due this year, and the next, and the next.

Well, let us turn to one of those exceptions included in the executive order: General License # 2. This appendix to the order simply says that transactions “where the only Government of Venezuela entities involved are CITGO Holding, Inc. and any of its subsidiaries, are authorized.”

That means that CITGO can still participate in the markets freely. It can, for example, issue debt to cover imports with no impediment – as long as no other Venezuelan state entity is involved in the issuance. It means that trade between CITGO and PDVSA – equivalent to 33% of Venezuela’s imports to the US – can continue, as normal.

Given that the other US importers of Venezuelan oil are not entities of the Venezuelan state — last we checked Valero, Chevron and Phillips 66 are all publicly traded companies— they are also still permitted to import all the oil from Venezuela they want.

(The key word there is “still”. Valero —the second biggest importer of Venezuelan oil— has already started using more sweet, light crudes in its refineries in place of Venezuela’s heavy, sour mix in part because of price differentials between the two but, one suspects,  also in preparation for heavier sanctions down the line.)

Claims that these sanctions alone would spell the end of CITGO or the decline of Venezuela’s exports to the United States are simply bogus. One only has to look into the details of the executive order to see that plainly. Perhaps it makes for good politics, it is pure nonsense.

But, remember those individual sanctions with seemingly little bite? There are reports that these earlier set of sanctions that are having a much more direct effect on daily operations of oil trade between the US and Venezuela.

Claims that these sanctions alone would spell the end of CITGO or the decline of Venezuela’s exports to the United States are simply bogus.

Reuters has reported that shipments from Venezuela to the US have been barred from entry since their purchasers have been unable to secure letters of credit from US banks, since that would mean engaging in financial transactions with PDVSA’s chief financial officer, Simon Zerpa, one of the recently sanctioned Venezuelan officials.

In essence, Zerpa is barred from participating in any deal involving a US financial institution, whether it’s something large like debt issuance or restructuring (now also banned) or something small like a simple line of credit for a buyer of PDVSA oil. Buyers have reportedly had to pay for the crude in advance given they cannot use new lines of credit, an unsustainable situation for most importers.

While the broad sanctions on new debt issuance hurt Venezuela’s ability to raise funds, the specific carve-outs included in the executive order allow for oil trade to continue without many obstacles, aside from the wee detail of having the PDVSA CFO participating in the transaction.

10 COMMENTS

  1. Carlos, how, specifically, do these new sanctions compromise Maduro’s ability to pay down the looming 3.6 billion plus he owes in Oct? Can he still somehow “kite” these loans as he’s done before? At what point is the clown going to run out of options to keep raising money from Peter to pay Paul? Surely there is a tipping point somewhere, where even the Ruskies will stop throwing good money at bad.

    • One is that Venezuela now has to treat her buyers as credit deficient, they have to pay in advance. Since they are not credit deficient the only way Venezuela can entice them to do consistently and reliably so is to offer discounts on the already quite inexpensive oil.

      Transactions through non-US parties will be more crubesome, slowers and probably more expensive as well. Why bother dealing with Venezuela when you have easier access to better quality oil elsewhere? Again, a discount is the only long-term answer.

      It’s a straw in a pile that will break the camels’ back, not a drastic hit by itself.

      • Thanks for the clarification… I was too affraid to ask this myself w/o putting it into context.

        The money situation is a “catch-22”. But, doing nothing is worse at this point. IMHO

      • This article is simply wrong in all its premises. These sanctions have the regime shitting their pants…

        Taking out a ridiculous ad in the New York Times, and inviting bondholders to negotiate repayment terms based on other currencies. So they can issue new bonds on another/other currency/currencies to get around the U.S. sanctions.

        It took 3 days to prove how utterly wrong this author is.

  2. Went to a talk by Mexico’s Lopez Obrador today, who many compare to our dear departed intergalactico. The Mexican candidate radiates much less charisma, has a tenuous grasp on reality (says the two major oil discoveries announced in Mexico as a result of the 2014 reforms are “puro cuento”) and at this stage of the game still refuses to say anything negative about Chavez/Maduro(“prefiero no comentar sobre asuntos internos de otros paises, pero apoyo el dialogo e invito al Papa Francisco a mediar”).

  3. Why would anyone expect the Executive Order to restrict oil shipments? Trump said he ain’t playing that card yet anyways so why look for it between the lines and be surprised or disappointed it is not there?????

    • Most of these articles are written to cover both sides of the fence, totally non-commitel, so as to never feel embarrassed when proven wrong, And never to firmly stand for one position or the other.

      Journalists call this balanced analysis, but it’s basically just fear of taking a stand.

      This article isn’t a blatant example, but it reveals that clue.

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