PDVSA Debt Swap Plan Gets Early Thumbs Down From Investors

  • Company wants to exchange bonds due in 2017 for 2020 debt
  • PDVSA to offer new bonds at 1:1 ratio to old until Sept. 29

Investors aren’t happy with Petroleos de Venezuela SA’s $7 billion bond-swap offer.

Notes due next year from Venezuela’s state-owned oil company fell the most in six weeks Monday, sinking 2.5 cents to 76.4 cents on the dollar as of 12:40 p.m. in New York, after the company announced details of its plan to push out debt maturities late Friday. PDVSA said it won’t pay investors any more than face value to exchange their bonds for longer-term notes. Instead, it’s offering a lien on its U.S. refining arm as collateral.

Postponing debt payments is a key part of the company’s plans to survive the slump in oil prices over the past three years, which has sapped government revenue and resulted in shortages of everything from toilet paper to corn flour as officials reduce imports of basic goods to conserve cash. Venezuela has been on default watch for the past two years, yet has always managed to scrape together enough money to service its debts, even as foreign-currency reserves fell and its hard-currency drought led to shortages and protests.

The swap offer is “slightly underwhelming," said Anthony Simond, a money manager at London-based Aberdeen Asset Management, which oversees about $10.5 billion of emerging-market debt, including PDVSA notes due in 2016 and 2017. “PDVSA considers its Citgo collateral to be attractive, but I’m not sure the market will take it the same way."

The cost to insure PDVSA bonds against default for one year jumped 61 basis points Monday to 7,012 basis points, a price that implies a 52 percent chance the company will stop making payments some time in the next 12 months.

PDVSA is offering to swap $7 billion of bonds maturing in April and November next year for new 8.5 percent notes with payments staggered over the next four years. The new bonds will be backed by a “first-priority lien” on a 50.1 percent stake in Citgo Holding Inc., the unit that owns its U.S. refining arm, according to the prospectus published Friday. PDVSA said it valued Citgo Holding at about $8.3 billion net of debt at the end of last year.

“This may be too optimistic an assessment of Citgo’s’s potential market value,” Francisco Rodriguez, the chief economist at Torino Capital LLC, said Monday in an e-mailed note in which he said the value was closer to $4.8 billion. “In order to get a very high level of participation, PDVSA should be offering an exchange ratio of at least 1.3-to-1.”

Oil Minister Eulogio Del Pino said Monday in an interview on PDVSA TV that the offer was fair and that he hoped most bondholders would accept it. Venezuela has a “sufficiently advanced” strategy to meet its obligations should the offer be declined, he said.

“We think it’s fair for all those bondholders who have been with us and enjoyed excellent profits to keep that profit that is now even a bit better and with much better guarantees,” Del Pino said, adding that he had plans to talk with bondholders “in their offices” over the coming days.

The company will offer $1,000 of new bonds for every $1,000 of old debt tendered until Sept. 29, when the offer will fall to $950 per $1,000, it said on its website. The final tender date is Oct. 14.

The 50.1 percent stake in Citgo means a change of control could be triggered that would make other debt due before the new bond, with equity holders standing at the back of the line to get paid, according to Russ Dallen, a managing partner at Caracas Capital.

“PDVSA needed to get this right, and they didn’t,” Dallen said in a note to investors. “What this means for PDVSA is that default is ever more likely.”

BancTrust & Co. analysts led by Hernan Yellati said that positive aspects of the swap outweigh the negative, as it will push out maturities and reduce default risks perceived by some investors for the last quarter of the year and 2017 maturities.

“Although low oil prices have diminished PDVSA’s hard currency liquidity to an extent of raising concerns in the short-term, the company has been fulfilling its debt service schedule,” they wrote. The offered collateral, based on PDVSA’s valuation of Citgo, would secure about 58 percent of the new bond and results in a favorable net present value, according to the report.

D.F. King & Co. was named as the exchange agent for the deal. GLAS Americas LLC is the collateral agent. Credit Suisse Group AG is acting as financial adviser for the offer but won’t be soliciting holders or making any recommendation on the exchange, according to the prospectus. Law Debenture Trust Co. of New York is the principal paying agent.

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