PdV bond swap proposal under wraps, debt service looms

OREANDA-NEWS. September 19, 2016. Venezuelan state-owned PdV's plan to fend off a debt default by implementing a \\$7bn voluntary bond swap appears to be stalled as the oil company and its financial advisors hammer out the fine print.

PdV is hard-pressed to honor looming debt payments. The company's oil production is declining and shrinking export volumes are fetching far lower prices than two years ago.

The first big payment of \\$1.1bn is due on 28 October, followed by \\$2.3bn on 2 November.

The company has yet to issue a formal prospectus for the voluntary bond swap announced on 13 September by energy minister and PdV chief executive Eulogio Del Pino because the details are still not finalized, two government officials with direct knowledge of the proposed transaction tell Argus.

Del Pino's 13 September announcement that terms of the voluntary bond swap were ready was "premature and unhelpful," one of the government officials said. "Del Pino should have waited until next week."

"We invite all bondholders to review the pamphlet on the swap offer which will be published on our website and which will have all the details they need. We hope the majority of bondholders accept this, and those who don't will miss a tremendous opportunity," Del Pino said in a 13 September televised interview.

In a Twitter message on the same day, Del Pino said the information was already on the website.

PdV and Credit Suisse, which is managing the plan to swap PdV bonds maturing in 2016 and 2017 for a new bond maturing in 2020, agreed "months ago to maintain utmost confidentiality" until the plan was ready for marketing with a final prospectus and term sheet for issuance to bondholders and the news media," the official said.

Del Pino's remarks created market expectations that crumbled when PdV and Credit Suisse failed to issue any details or terms.

Del Pino's untimely announcement "was not a good way to start a critical financial transaction that was designed to avert PdV's default," another government official says.

If the swap is 100pc successful, PdV's bond principal payments and interest payments totaling almost a combined \\$9bn from October 2016-December 2017 would be reduced to around \\$1.75bn of principal payments annually, plus interest, in four payments scheduled in 2017, 2018, 2019 and 2020.

In the absence of details, it is hard to measure investor appetite for the new debt instrument. But local and foreign bond traders concur that up to 60pc of bondholders must participate in the swap for it to succeed. "But over 70pc participation would be better," a Caracas trader said.

Key technical issues still under discussion by PdV and Credit Suisse when Del Pino jumped the gun include pricing and the legality of guaranteeing the new 2020 bond with shares in PdV's US subsidiary Citgo Holdings.

By way of example, one trader said swapping \\$8bn of 2016 and 2017 bond principal for an \\$8bn bond maturing in 2020 and paying 8pc annual interest would cost PdV about \\$10.8bn including \\$2.8bn of interest paid over four years.

But investors may not be attracted to a new four-year bond paying only 8pc as political and economic uncertainty escalates in Venezuela.

A PdV 2020 bond with a coupon (interest rate) of 11-12pc would be far more attractive to existing PdV 2016 and PdV 2017 bondholders, the trader added. But a four-year bond with a 12pc coupon would wind up costing PdV about \\$12.4bn in total principal and interest payments by 2020.

Bondholders also want to review the detailed proposal to determine the appeal of accepting Citgo shares as a guarantee.