Venezuela is turning to friends in Russia and China to get its hands on desperately needed cash.
With the state-owned oil producer effectively shut out of the bond market with yields exceeding 20 percent, the company has hired Moscow-based Gazprombank JSC to arrange the sale of as much as $1.6 billion of yuan-denominated notes.
It’s the first time a Latin American junk-rated company is borrowing Chinese currency in the bond market.
Venezuela is betting it can get cheaper financing by courting investors in nations with which it has strengthened political ties over the past decade. The country’s foreign reserves have plunged to a 12-year low of $16.3 billion after the price of oil plummeted, fueling concern Venezuela won’t have enough cash to pay debt.
“Venezuela’s desperate, so this is the time for creative structures, but a purely market-based transaction doesn’t seem feasible,” Siobhan Morden, the head of fixed-income strategy at Jefferies Group LLC, said from New York. “There would have to be some kind of sponsorship, maybe from Chinese intra-government entities.”
Venezuela’s Information Ministry and officials with PDVSA didn’t respond to e-mails seeking comment about the financing deal.
Gazprombank is 36 percent-owned by gas producer Gazprom, Russia’s biggest company. The bank is Russia’s third-biggest lender by assets.
“PDVSA is our client, and at our client’s request, we’re discussing various financing schemes, including the possibility of a special instrument, special bonds, that would be denominated in renminbi and be placed in Hong Kong together with our Chinese partners,” Gazprombank First Vice President Boris Ivanov told Bloomberg on June 19.
Venezuela’s move to target Chinese investors comes as the OPEC nation has become increasingly reliant on the Asian country for financing. China, whose $3.7 trillion in foreign reserves are the world’s largest, has lent Venezuela $45 billion over the past decade.
“China has, for the last five or six years, been Venezuela’s largest creditor,” Patrick Duddy, a former U.S. ambassador to Venezuela who’s now a professor at Duke University’s Fuqua School of Business in Durham, North Carolina, said at an event organized by the Council of Foreign Relations Tuesday. “They are large players because they are basically bankrolling the government.”
Venezuela and PDVSA combined have $6.6 billion of debt payments to make this year.
Traders put the probability the country will default in the next year at 52 percent, the highest in the world, according to data compiled by Bloomberg.
Venezuela and PDVSA “will likely be able to pay their obligations until the first quarter of 2016,” Barclays economists Alejandro Arreaza and Alejandro Grisanti said in a note to clients Monday. “Further payments will depend on the oil price and China’s ability to maintain or increase its level of exposure to Venezuela.”