Another PDVSA bond…

May 18, 2014


This week, PDVSA announced yet another bond to be issued in the international markets. This time, a 6% coupon bond which matures in 2024, will pay one third of it in 2022, one third in 2023 and the final maturity in 2024. This is not your usual bond issue, PDVSA said that it would sell it to Government-owned public banks (which I take it includes the Venezuelan Central Bank) in exchange for Bolívars. And just like everything the revolution does, things get complicated, because with the many exchange rates in existence in Venezuela, the only thing we can be sure about is that it will not be sold at the parallel market rate, but one of the three rates sponsored by the Government, the Cencoex rate (Bs. 6.3 per US$) the Sicad 1 rate (Bs. 10 per US$) and the Sicad 2 rate ( Bs. 49.99 per US$ or some silly number similar to it, with decimals and everything)

You see, legally, PDVSA can not sell this bond at any rate different than the Bs. 6.3 per US$ rate to the Government owned commercial banks. That is what the foreign exchange agreements between the Government and the Venezuelan Central Bank (BCV) say. Under those agreements, PDVSA can sell dollars either at Bs. 6.3 per US$ or at Sicad 2, where it can sell dollars that did not come from producing oil. But clearly, this is not the case, PDVSA will not sell the bonds directly to Sicad 2, which is what it would need to do.

Thus, at first glance, it would seem as if the bonds will be sold to the banks at the Cencoex rate. Of course, Chavismo can simply ignore the law, it would not be the first time.

Now, PDVSA or the Government did not say anything else about the plans for this bond. Because, among many theories, the bonds could be sold in Sicad 1, Sicad 2 or they could be given by Cencoex to sell to those importers that are owed money from 2013. In all hypothetical cases, the bonds will be sold differently. For Cencoex, an importer would have to accept a discount. You see, the bond pays 6% per year, but Venezuela bonds trade at roughly a yield to maturity of say, 13%  around 2024, so that the bond in US$, if sold today, would trade around 60% of its face value. This means, that if someone was paid with it, they would only receive 60% of its nominal value.

I don’t know many importers which would accept such an offer, but you never know…

(It also means that the 30% payment to importers would go down to 18%, not an effective solution in my book to this problem)

Now, suppose you are a Government-owned bank and your bank is given US$ 50 million at Bs. 6.3 per US$. If you sell it at the Sicad 1 rate, you will get Bs. 10 per US$ nominal value. Your bank makes a tidy Bs. 3.7 per US$, you bought at Bs. 6.3, you sell at Bs. 10.  That is a nice 58% profit for doing nothing.

But there is a better deal. If you sell the bonds in the Sicad 2 system, you will sell the cash value of the bonds (60% of nominal value) at Bs. 50 or an effective Bs. 30 per US$ that you purchased for Bs. 6.3 per US$. That is a Bs. 23.7 profit per US$, almost 400%… (Who cares about decimals, no?)

Only in Venezuela…

So, what’s a bank’s President to do? Supposedly, they will follow orders, to sell x per cent in Sicad 1 or y per cent in Sicad 2. But do you really believe that this uncoordinated, mismanaged, every-man-for-himself Government will or can keep track on what happens to all these bonds? I don’t. I think there is an order to sell in Sicad 1, but soon every bank will do whatever it pleases its President, not Ramirez or Maduro.

But think about it. PDVSA, the issuer of the bond, is getting little benefit from it. It now has more debt at US$ 48 billion, but the apparent beneficiaries of the bond are the local banks and the BCV that sell it into Sicad 1 or Sicad 2. Moreover, PDVSA is issuing it with such a low coupon, that even if it is a bond issued only to satisfy the bizarre foreign exchange system of this Government, it only really generates about US$ 3 billion out of a US$ 5 billion issue in real money that can be used by importers.

But it does little to help PDVSA with its investments or its huge (and increasing!) debt with the Venezuelan Central Bank. Nor dos it help the company in its investments needs, it only allows the revolution’s stupid and increasingly dumb and complex foreign exchange system to survive a little longer.

In fact, think about it, PDVSA seems to be more worried about annual coupon payments, taking a 50% discount on it with the low coupon, than in the final payments in ’22, ’23 and ’24, which only take a 40% cut. Maybe they are not even sure they will be around to pay at that time,  and are throwing another Hail Mary pass at the revolution’s survival.

And thus PDVSA becomes the oil company with the second highest debt in the world (after Pemex) except that the money is in Bolívars and will have little impact on PDVSA’s production, as the debt is only being issued to help the revolution survive.

As to the debt, PDVSA’s or Venezuela’s, it has gone up too much for my taste.Foreign investors really believe there is some form of pragmatism in Maduro’s Government. If Ramirez is the pragmatist, God help Venezuela! I don’t think Venezuela or PDVSA needs to default, but you never know with these guys. I would wait again until yields get to 18% or so before buying. The bonds could lose 15% again at anytime like they did in February, given the Government’s policies. To get that risk and volatility, I have to get paid, 13% yield just does not cut it. There will be a good buying opportunity, Argentina does seem to have real pragmatists to park the money in the meantime.

14 Responses to “Another PDVSA bond…”

  1. Latulla Says:

    Nigerian girls! donde esta?

  2. Juan Largo Says:

    I was told by a relative working in the financial sector that with decreasing ways to bilk the dwindling economy of reales, this phony bond issue gives Maduro chums in the banking biz a chance to turn a few Bs. As was pointed out, there is no infrastructure in place nor yet any motivation to monitor how these bonds are sold or at what rate – and that’s the point.

    The gov is approaching an anything-goes desperation as the notes keep coming due (pharmaceuticals, airlines, etc.) on their gaziliion dollar debt. Once the flow of import goods simply dries up, I am told the game will really get chancy and bizarre.

    I was also told that once the cash flow to the military begins to dry up, and it has to sooner than later, the public sector will crash in a hurry. An increasing amount of the money, mostly generated from oil sales, are going to the military, while basic goods and services are thinning by the day. Not wanting to be alarmist or reactionary, but I have to wonder how much longer this can on. With virtually everything being imported, with such staggering outstanding debts, and with the ports in a knot, when does the bottom fall out completely?

  3. Dr. Faustus Says:

    There are rumors that the Formula 1 Team Lotus truck has been hijacked at a highway rest stop just outside of Marseille, France. With Pastor Madonado seated in the passenger seat, the multi-colored truck was stolen by masked terrorists as it was headed in the direction of Monaco for the upcoming Grand Prix. Air France officials immediately put-out a disclaimer that they were in no way involved with this incident. They have come under increasing suspicion as a result of their repeated attempts to find something, anything, of value from Venezuela to force a reconciliation of their outstanding bill. The current whereabouts of one Pastor Maldonado, to the delight of some Lotus officials, is still unknown.

  4. Alej Says:

    I see a one bolivar banknote selling for $4.99 US on ebay, the ones printed when they did not have the regular bolivars.

  5. Boludo Tejano Says:

    In its 2012 Annual Report, Informe de Gestión Anual 2012 (parte 1) page 10, PDVSA claimed that oil export sales in 2012 were 2.56 million BOPD @ $103.42/BBL. That translates to $96 Billion oil export income for 2012. Yet PDVSA needs to engage in Cash-Starved Wimpy Economics: “I’ll have a hamburger [right now], for which I will gladly pay you Tuesday.” Wimpy Economics: a.k.a. voodoo economics. An entity with $96 billion export income in 2012 shouldn’t have to KEEP BORROWING money via bonds.

    Like Miguel and President Herrera have said, [$96 billion dollars in export income:] ¿Dónde están los reales?

    • Guineo Verde Says:

      I always heard the heavy Venezuelan oil sold for less than the lighter oils. Is the 2.56 million all being exported or is that total production? What is the amount they are giving away to ALBA and which probably won’t be paid back or paid back over 25 years?

    • Boludo Tejano Says:

      According to the PDVSA 2012 figures, the average daily production was 3.03 million BOPD, of which 2.56 million BOPD were exported. Heavy Venezuelan crude going for less than the lighter oils is reflected in the 2012 OPEC Basket Price of $109.45/BBL compared to the $103.42/BBL average for Venezuela.

    • Boludo Tejano Says:

      What is the amount they are giving away to ALBA and which probably won’t be paid back or paid back over 25 years?
      Only Iris Varela’s hairdresser knows for sure, and she ain’t telling. 🙂
      Commenter bill bass at Caracas Chroniclesposted an estimate.

      Ive attempted some back of the envelop calculations on Pdvsas likely income based on a Reuter report and some Ministry announcements reported by the Universal about 2013 exports and their destination .

      1. total production : 2.8 million bls per day
      2.. domestic consumption : 750.000 bls per day (which is sold at a heavy loss)
      3.- total volume available for exports : 2.050.000 bls per day of which :
      – 580.000 bls go to China
      – 400.000 bls pe day go to India
      – 800.000 bls per day go to the US (EIA figures)
      – 120.000 bs per day go to Europe
      – 150.000 bs per day go to Petrocaribe and Cono sur ( to be sold under ‘special’ conditions)
      4. of the bls going to China some 350.000Bls per day are used to pay Chinese Loans
      5. of the 150.000 bls per day sent to Petrocaribe and Cono Sur 50% is financed for 15 years and 50% paid thru barter deals , which in the case of Cuba ( 100.000 bls) most of which goes to pay for Cuban medical and technical assistance to the govt and part of the rest is simply never paid or paid only occassionally .
      6.- Venezuela imports some 100.000 bls a day of gasoline and gasoline components from the US which it pays with money recived for exports to other paying countries ) .(although these US imports are dearer than most Venezuelan export crudes)

      If you add the volumes under 4, 5 and 6 above, the net actual income Pdvsa gest from its exports sales are equivalent to 1.450.000 bls .

      While this estimate for 2013 is just that – an estimate- it is more credible than the PDVSA claim of exporting 2.56 million BOPD in 2012 and getting paid $103.42 average/BBL. After all, Venezuela wouldn’t have all its goods shortages if it really were taking in $96 Billion a year in oil exports income.

  6. Nitin Jain Says:

    Couldn’t agree more with your final conclusion. Its counter intuitive but argy issuance is positive for argy. until recently Argy was not even on the menu of invest-able universe due to lack of liquidity but with recent issuance it has changed the equation.

  7. roberto gonzalez Says:

    Estoy de acuerdo. Acá los números no suman. Para mí la deuda argentina ofrece mejor riesgo retorno. x lo menos el dmi está encima de sus estadísticas oficiales y el año que viene con toda seguridad habrá cambio de régimen.

  8. moctavio Says:

    Bloomberg data on bonds Pemex $ 58 millardos, PDVSA $48 millardos, Gazprom $ 29 millardos, Petrobras $27 millardos, Exxon $ 11 millardos.

  9. Noel Says:

    Fascinating look at the financial contortions of the current government in Venezuela and the burden assumed by PDVSA. Actually, I think that Petrobras may be the #2 in the debtor league with net debts in excess of US$ 100 billion.

    I fully agree with your last paragraph, for while Argentina has beefed up its economic and financial team and is taking some pragmatic fiscal and FX measures (kicking and screaming though by many), that doesn’t seem to have started in Caracas.

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