Chavez Cancer Fight Ignites PDVSA Bond Rally

Chavez Cancer Fight Ignites PDVSA Bond Rally
Storage tanks sit elevated at the Petroleos de Venezuela SA, PDVSA, Amuay refinery in northern Venezuela. Source: PDVSA via Bloomberg

Debt traders are pushing up the bonds of state-owned Petroleos de Venezuela SA as they envision a nation without President Hugo Chavez that may free the oil producer from a tax rate as high as 95 percent.

The company’s $26.5 billion of debentures gained 2.1 percent last week through May 3, the most among the 50 biggest emerging-markets issuers of dollar-denominated debt, building on April returns of 2 percent, Bank of America Merrill Lynch index data show. The extra yield investors demand to buy debt from the owner of U.S. refiner and marketer Citgo Petroleum Corp. compared with the average for speculative-grade U.S. energy companies has dropped by more than half this year.

“Outside investors think anyone is better than Chavez at this point from an external market position,” said Raymond Zucaro, a money manager in Newport Beach, California, at SW Asset Management LLC, which oversees about $230 million of emerging-market corporate debt. “The evil unknown is better than the evil known from the investors’ perspective.”

The oil producer with crude reserves larger than BP Plc, Exxon Mobil Corp. or Petroleo Brasileiro is drawing interest from debt investors as Chavez, 57, receives radiation in Cuba for an undisclosed form of cancer. Chavez, the nation’s leader since 1999, has weighed down the company known as PDVSA with policies making it the “primary source” of government income and social spending, according to Moody’s Investors Service.

Four Times BP

Bonds of PDVSA were the second-most actively traded dollar-denominated corporate securities by dealers last week, with 552 trades of $1 million or more, trailing only Goldman Sachs Group Inc., according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Amid the trading frenzy, the company’s bonds fell 2.6 percent on May 4, Bank of America Merrill Lynch index data show.

Yields of 12 percent on its $2.4 billion of bonds due November 2021 are three times as high as those with similar maturities issued by Rio de Janeiro-based Petroleo Brasileiro and four times as high as notes from London-based BP, Trace data show.

Average yields on PDVSA bonds dropped to 10.6 percent on May 3 from 15.1 percent at the end of 2011. The yield gap with the average speculative-grade rated U.S. energy company narrowed to 3.6 percentage points from 7.7 percentage points, Bank of America Merrill Lynch index data show. The gap was at 4.3 percentage points on May 4.

Adding Debt

If Chavez dies or is removed as Venezuela’s leader, “it’s probably a positive credit event,” said Sabur Moini, a money manager who helps oversee about $2 billion of high-yield debt at Los Angeles-based Payden & Rygel. “PDVSA is sort of a quasi-Venezuelan sovereign, so that’s a big factor of the price appreciation.”

The company had $34.9 billion of debt at the end of 2011, $10 billion more than a year earlier, according to Fitch Ratings.

“The company used to be almost debt free and has been highly levered up in the past few years,” said Thomas Coleman, an analyst at Moody’s Investors Service in New York. “The company should be making a lot more money than it does.”

The bonds are gaining even as PDVSA adds debt. The government has borrowed at least $40 billion from China in less than four years and is paying that country back by shipping it about 600,000 barrels of oil a day. The Japan Bank for International Cooperation and other Japanese companies agreed to lend PDVSA $1 billion for oil projects, according to an April 24 statement.

Laws Altered

“They’re getting financing from China and other countries where they pay it back in barrels,” Coleman said. Its income and future production “is a lot more tied up than it even looks.”

Chavez altered the nation’s public finance law on March 29 to allow him to borrow more than the budgeted amount without seeking congressional approval. The total current debt of the central government is $79.3 billion, not including the Chinese loans or PDVSA’s debt, according to the Finance Ministry.

The increase in borrowing “reflects a trend of higher capital spending and royalties and taxes, but is driven primarily by rising payments to support government social programs,” Moody’s analysts Coleman and Steven Wood wrote in a Feb. 7 report.

Chemotherapy, Radiation

PDVSA plans to sell $3 billion of 20-year bonds with 9 percent yields before May 14, according to a government official who is involved in the operation. The company is doing so as its funding costs drop by $1.2 billion in less than five months, Bank of America Merrill Lynch index data show, as the extent of Chavez’s illness became more apparent. That’s the difference in interest payments between what PDVSA was paying at year-end and May 3, based on its $26.5 billion of bonds outstanding, Bloomberg data show.

The Venezuelan president has undergone three operations and several rounds of chemotherapy and radiation treatments in Cuba since June, fueling speculation that his illness is worse than he’s admitting. On April 30, he sought congressional permission to leave for more than five more days as he continues cancer treatments. He maintains that he’ll be able to seek reelection in an October election.

While the debt would likely rally dramatically if Chavez were no longer Venezuela’s leader, it would sell off as the nation became mired in civil unrest, Zucaro said.

“Chavez has been the glue that’s held Venezuela together for the past 13 years,” he said. “Without Chavez, how do you keep that glue together?”

Gradual Sale

PDVSA has supplied the Venezuelan government with more than 50 percent of its revenue through royalties and tax payments, according to the Feb. 3 Fitch report. The government changed the company’s charter and mission statement in 2008 to allow it direct participation in developing the nation’s health care, education and agricultural programs, Fitch said in the report.

The company said its total revenue last year was $124.75 billion, up from $94.14 billion in 2010, according to data compiled by Bloomberg. Its corporate credit rating is B1 from Moody’s, four steps below investment grade, and B+ from Fitch.

PDVSA’s bonds dropped on May 4 as U.S. employers added fewer jobs than forecast, the cost of oil fell below $100 a barrel for the first time since February and amid reports of the planned $3 billion of debt issuance this month.

Prices of PDVSA’s securities due in November 2021 climbed 6.6 cents in 10 days, to 84.1 cents on the dollar on May 3, according to Trace. During that time, similarly-dated debt from Petroleo Brasileiro rose 0.2 cent and BP’s 2021 notes increased 0.05 cent, the data show.

The new bonds PDVSA plans to issue will probably be sold gradually through the central bank’s currency market, avoiding a glut, Victor Sierra, a managing director at Torino Capital LLC in New York, said in an e-mail.

“The net effect on the market should be fairly neutral in the short end,” Sierra said. “I expect a rebound in the coming days as Chavez health issues continue.”

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