Debt default clouds gathering over PdV

OREANDA-NEWS. September 12, 2016. Venezuelan state-owned oil company PdV faces the risk of default as early as next month unless it convinces bondholders to sign up for a voluntary debt swap.

PdV wants to swap up to \\$8bn in bonds maturing in 2016-17 for new bonds maturing from 2024 onward. On the immediate horizon is a \\$1bn bond principal payment due on 28 October, with another \\$2.3bn of bond principal due for payment on 2 November. PdV has a further \\$3bn of bond principal due on 12 April 2017 and another \\$2bn due on 2 November 2017.

"It's now or never, the next two weeks are critical," a senior energy ministry official said today when asked about the progress of energy minister Eulogio Del Pino's year-long efforts to reschedule debt payments that PdV and the Venezuelan central bank do not have sufficient cash to cover.

PdV's voluntary bond swap proposal must be reviewed by the affected bondholders, who then would respond to PdV through swap manager Credit Suisse to confirm or decline their participation, the ministry official said.

PdV has not yet launched the swap offer because a decision has not been reached on the interest rates and yields.

Bond traders estimate that a successful swap, even with shorter maturities starting in 2021 instead of 2024, would require interest rates of over 30pc to attract investors, in light of Venezuela?s severe credit risk.

The \\$3bn PdV 2017 bond paying 5.25pc that matures on 12 April 2017 currently is trading at an 85pc yield, a US-based bond trader tells Argus.

"I can buy that PdV 2017 bond today at 68.75 cents on the dollar and double my money in the seven months left until the principal is due next April," the trader explained. "But investors aren't buying."

"They can cash out next April with a nice profit and not worry about Venezuela anymore, unless they hold more bonds maturing in 2017 and later," the trader said.

The opposition-controlled National Assembly's warning that all debt and joint venture agreements signed by President Nicolas Maduro's government since the start of 2016 will not be recognized or honored by Maduro's successor has further dimmed investor perceptions of Venezuela?s creditworthiness, the trader said.

Citibank's end-July decision to withdraw as the fiduciary agent for up to seven PdV bonds maturing in 2016, 2017, 2021, 2022, 2024, 2026 and 2035 "complicated the bond swap discussions," the energy ministry official told Argus.

Citibank's decision to close its correspondent accounts with Venezuela's central bank and withdraw as the official agent of payment for PdV bonds totaling up to a combined \\$26bn "created uncertainties that must be cleared up within the next two weeks," the ministry official added.

But Citibank "contractually cannot walk away whenever it wishes from its fiduciary responsibility to the bondholders and to PdV," the ministry official said.

Citibank's contract stipulates that it cannot withdraw as the pay agent for PdV's bonds until a new bank is contracted by PdV to fulfill that role, the official explained.

Citibank will continue to serve as the agent for the PdV 2016 and 2017 principal payments due on 28 October and 2 November if a replacement is not contracted by then, the official said, adding that "any failure by Citibank to discharge its fiduciary obligations potentially would expose the bank to lawsuits from bondholders and PdV."

Citibank has not commented.

PdV suggested this week that an unnamed Portuguese bank could be contracted to replace Citibank. PdV is also in talks with Asian banks including China's state-owned Citic Bank, which already acts as PdV's agent for oil exports and commercial services invoices, the ministry official said.

The central bank could cover the combined \\$3.3bn of PdV bond principal due at end-October and early-November from its hard currency reserves, which currently total \\$12.1bn. But with less than \\$300mn in cash on hand, the bank would have to sell gold bullion reserves to enable PdV to pay its bondholders, a bank official says.

The bank reported over \\$7.5bn of gold bullion at end-July, but a bank economist said the institution?s real gold holdings currently are "almost \\$1bn lower than the bank reports officially."

Barring an oil price spike, PdV cannot generate sufficient hard currency revenue during the remainder of 2016 to cover its debt maturities, operating expenses and also supply the central government's funding needs, the energy ministry official acknowledged.

"If the voluntary bond swap fails, PdV and the government will be between a rock and a hard place financially at the start of 2017," the ministry official added.

Cash-starved PdV has successfully raised over \\$15bn in new loans and cash since 2013, including the issuance of over \\$2.4bn of new debt through its US downstream subsidiary Citgo, securing credit lines totaling about \\$6bn with partners and contractors such as Chevron and Schlumberger, signing new cash-for-oil deals worth over \\$5bn with China Development Bank, and restructuring about \\$5bn of PetroCaribe debt owed by the Dominican Republic and Jamaica with steep discounts.

But PdV appears to have maxed out those options. "It will be either a voluntary bond swap or a credit event," the trader said.