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  HOME | Opinion (Click here for more)

VenEconomy: A New Batch of PDVSA Junk Bonds

From the Editors of VenEconomy

Venezuela’s state-run oil company Petróleos de Venezuela (PDVSA) is once more turning to a new issuance of bonds after the Government finds itself with a drought of resources in the middle of an election campaign and with a social and economic crisis in full swing.

By resuming the practice of indebtedness with dollar-denominated bonds, which was halted in 2011 due to burdensome maturities of up to 12% that has been producing a high country risk for Venezuela many years ago, Rafael Ramírez, in both of his roles as PDVSA president and vice-president for Economic Policies, announced the company is readying the issuance of its PDVSA 2026 bond for $ 4.5 billion, one of the biggest-ever issuances by the oil company.

These bonds would have equal and consecutive maturities of $1.5 billion each in 2024, 2025 and 2026 with a coupon of 6%.

It even sounds very nice: “six percent.” But there is another reality. PDVSA bonds are considered as “junk bonds.” These are currently sold with yields of nearly 16% a year. This means that we can expect the market value of this particular issuance to stand around 66% of its nominal value. For example, the value of $4.5 billion in new bonds would not be higher than $3.0 billion.

This raises the following question: Who would buy these bonds at the price set by Ramírez, 100% of their nominal value? The answer is: nobody would! But, according to Ramírez, this is not about a regular placement. This is about a “private placement” through which:

  • $1.5 billion will be handed over to the central bank. No one knows whether it is to write off part of the huge existing debt or this is about further indebtedness.

  • $3.0 billion would be used to write off debts PDVSA has with its providers.

In other words, providers would be offered bonds with a scant market value of $2 for every $3 PDVSA owes them.

Some of them will accept this deal since sometimes is better safe than sorry. Others will turn down the offer, thus taking the chance that the Government may “expropriate” their assets without paying a single cent for them, such as the case of 72 contractors at Maracaibo Lake in Zulia state in 2008, or back in 2011 when the Government took several oil drills from U.S.-based drilling contractor Helmerich & Payne, or four weeks ago when the Government took two drills from Superior Energy Sources, an oilfield services provider also based in U.S.

All this is a “lose-lose” situation for PDVSA providers as a result of over 15 years of mismanagement of Venezuela’s oil industry by the own Ramírez, who is now announcing this bonds issuance without any shame at all and as it was a big deal.

VenEconomy has been a leading provider of consultancy on financial, political and economic data in Venezuela since 1982.

Click here to read this in Spanish

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