Inside, confidential and off the record
PDVSA swap is a trap
The problem with a voluntary debt swap is not just that it
would increase Venezuela's total debt outstanding, a debt that
Venezuela can never repay under current economic policies.
Say you borrowed $100 from your cousin Tony three years ago and promised to pay him next week. You gave him an IOU and everything. Next week used to seem an eternity away, but now next week is this week, and you don't have the 100 bucks. So you go up to him and say, “hey Tony, how about we swap? You give me back that IOU for $100 due next week and I'll give you this shiny new IOU for $150 due two years from now. How about it?” Tony looks you up and down and says “alright, I can go for that,” and you swap IOUs.
Congratulations, you've just reprofiled your debt.
For a hard-pressed PDVSA, this reprofiling idea has been floating around for quite some time. We have covered it in the past ( Exhibit A , Exhibit B ). But it seems to be coming to a head: following the initial pop in bond prices driven by the crescendo of rumors in the market of a swap proposal backed by Rotschild & Co . , Eulogio Del Pino openly endorsed the idea , and promises to deliver an ‘attractive offer' for the tenedores holding the short-end debts.
PDVSA bonds are flying on the rumor-turned-statement and PDVSA 2016/17 bonds are trading at 2016 highs, despite an almost -20% fall in crude oil prices in the last weeks.
Every big Wall Street player has published research reports on the subject; among them, Scotiabank's Joe Kogan stands out from the crowd, putting the proverbial dedo en la llaga on his abstract:
The problem with a voluntary debt swap is not just that it would increase Venezuela's total debt outstanding, a debt that Venezuela can never repay under current economic policies. Rather, it would be so costly and wasteful that future governments could even try to repudiate any new bonds issued.
Let's do a quick recap of the five W's of the deal.
Rumor has it that PDVSA will be offering a 4-year bond maturing in 2020 (payable starting 2018), with a slightly higher interest rate. PDVSA plans to swap old bonds with a face value of $100 for new bonds with a higher face value, such that both bonds have the same market value on the exchange day (i.e. the same net present value). Market analysts estimate that the required face value for the new bonds ranges from 140$ to 200$, which implies an increase of $3.4 to $8 billion in PDVSA's financial debt. That's right, the solution to PDVSA's debt problem is to pile on more debt.
As we've learned, the holders of short-end PDVSA bonds are dominantly locals, both from the public and private sectors. Venezuelan capital loves to bet that the government will pay its debts no matter what. Since political and economic actors often have a financial stake in PDVSA bonds, a successful exchange is a priority for them.
Del Pino says that it will happen “soon”. Some analysts say it's a matter of days, others talk of weeks. In any case, the hard deadline is October 28th, when the$1Bn PDVSA 2016 bond issue matures. On the subject, Blanca Vera claimed that the reprofiling effort is still very incipient, with no bank assigned to the deal yet; her source names former Bandes president Temir Porras as the lead advisor to Del Pino on the matter, a deja-vu of the govt's affair with Lazard back in 2014 .
The legal jurisdiction for the deal is still undefined. NY law makes the most sense because 2017 bonds, which account for 7/8ths of the debt due in 2016-2017, were issued under it. Credit rating agencies have reiterated that any debt exchange that doesn't comply with the neutral net-present-value rule is considered a selective default. If the whole point of the exchange is to circumvent the D-word, follows that the government will agree on working with NY law to appease the rating agencies.
The official stance is that PDVSA has a short-term liquidity problem due to the fall in oil prices, and not a long-term solvency problem. In any case, the liquidity problem is so severe that it's hampering the company's ability to sustain production levels, and hurting its long-term viability by a death-circle kind of effect (insert cool link). PDVSA claims that its better for investors to help the company muddle-through these hard years to be handsomely rewarded in the future, when oil recovers and PDVSA returns to its former Petrodollar-printing glory.
What does Scotiabank's influential analyst Joe Kogan think of all this?
- The cost of the swap is going to be ridiculous, which defeats its purpose; that is, to help the country stay current on another year of debt payments. There's little reason to believe that oil prices will rise much higher in the foreseeable future, and it's becoming evident that PDVSA can't operate properly and at the same time continue servicing its debts. In other words, there's no point.
- The proposed swap will only create bigger problems a year from now. It's not addressing a way for PDVSA to recover from its recent fall in crude output, it's not substantially reducing debt service in the medium term, and it's joined by another kind of swap ( +$800mm in commercial to financial debts , relating to service companies like Schlumberger and Halliburton ) which would also mature in a few years, meaning the debt service problem is just getting worse on all fronts.
- The government is doing this swap while knowingly backing off from much-needed structural reforms that can't be postponed any further. The right thing to do would be a broad-based reprofiling of ALL of PDVSA and Venezuela's debts (and with a much larger time horizon), giving the company and the Republic the necessary wiggle room to apply deep economic reforms able to generate growth in the medium term. But they're not going to do that. Instead, Maduro & Co. are playing survivor, just thinking on a way out their shortest-term problems without giving a moment's thought to the future. It's not even como vaya viniendo vamos viendo ; we are way past that league. The only recent nod in the right direction came from Del Pino and it was quickly shot down by some of that good-old Plan de la Patria bullshit, courtesy of PSUV poster child Elías Jaua .
- The proposed increase in PDVSA debt is so big and the long-term implications so significant, that the National Assembly has a moral and strategic incentive to block any attempts to pull off the swap , or at least to declare the deal null and void under the Constitution's Article 312. This would open the opportunity for a hypothetical new opposition-controlled government to repudiate this debt in the future, as they could claim that the proceeds of the deal would be directed to ‘illegitimate purposes' (paying off the well-informed bachaqueros of Wall St. ) with a deal that lacked parliamentary authorization. Y lo peor es que tendrían razón.
PDVSA is trying to kick the can down the road without addressing the structural issues that brought it to the verge of default in the first place. Even if it succeeds, it will be in this position or worse in a year or two. En fin, quieren tapar el sol con un dedo…
Daniel Urdaneta / Caracas Chronicles / July 31, 2016
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