Venezuela Bonds Tank as PDVSA Swap `Substantially' Short of Goal

  • Early deadline for bondholders pushed back unitl Oct. 12
  • Country’s overseas bonds fall the most in nine months

Venezuelan bonds plunged the most in almost nine months after state oil company Petroleos de Venezuela SA extended an early deadline for bondholders to exchange notes due next year for longer-dated ones after investor demand fell short of the required level.

Prices on the government’s $4 billion of notes due in 2027 headed for the biggest decline since January, sinking 2.62 cents to 54.5 cents on the dollar at 11:04 a.m. in New York. PDVSA’s notes due in November 2017, which had been targeted in the swap proposal, tumbled 2.32 cents to 83.8 cents on the dollar.

Investors’ lack of interest in the swap damped expectations that Venezuela would win more time to wait for oil prices to recover by delaying payments, which would have improved the financial outlook in a country suffering from a shortage of hard currency. PDVSA pushed the early-tender deadline for a swap of as much as $5.33 billion of bonds to Oct. 12 from Oct. 6, saying bondholder participation was “substantially less” than the minimum threshold of 50 percent.

“Repetitive delays now logically suggest that the deal is struggling,” Siobhan Morden, the head of Latin America fixed income strategy at Nomura Holdings Inc., said in an e-mailed note. “The stakes are high on whether a successful transaction allows for the muddling through strategy to continue or whether an unsuccessful transaction reaffirms repayment stress through next year.”

In another potential setback for the swap, ConocoPhillips sued PDVSA in a Delaware court on Thursday, claiming that terms of the swap offer that give participants new bonds backed by a lien on its U.S. subsidiary, Citgo Petroleum Corp., is set up to defraud creditors and move assets to Venezuela from the U.S.

ConocoPhillips accused PDVSA of engaging in a campaign to liquidate assets and repatriate its profits to keep them out of the hands of arbitration creditors. The country faces more than 20 other arbitration claims, exceeding $10 billion in damages, over nationalizations, according to the suit, which seeks a court order barring PDVSA from further disposing of assets.

The cost to insure Venezuela’s debt against nonpayment for five years with credit default swaps rose 4 percent to 3,034.24 basis points after reaching a 10-month low on Monday.

The company wants to reduce debt due in the next 18 months by swapping the bonds for new 8.5-percent securities payable in annual installments until 2020. The exchange’s upper limit is three quarters of the outstanding notes. The previous early deadline, which grants investors better terms, was 5 p.m. in New York on Thursday with a final expiration on Oct. 14.

PDVSA, as the company is known, didn’t mention a new final deadline for the exchange in Thursday’s statement. It said the early deadline could be changed at the company’s discretion.

Years of declining output and a crash in oil prices pushed the company, as well as the government, to the brink of default. While some ratings companies have said they would treat the transaction as a default, investors had been betting that it will allow both the company and the country to keep making payments on the best-performing debt in emerging markets this year.

Prior to the swap extension, Venezuelan bonds had returned 27 percent to investors in the past two months amid optimism that the swap would succeed.

After initially offering investors $1,000 of the new securities for every $1,000 of the old bonds offered, PDVSA on Sept. 26 sweetened the deal by pledging $1,170 bonds for every $1,000 of the April 2017 securities tendered before the early deadline and $1,220 for the November 2017 bonds. After the early deadline, investors can get $50 less per $1,000.

— With assistance by Ben Bartenstein, and Sophia Pearson

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