Venezuela Special October 2016


Bond swap launched, meets unenthusiastic uptake

In late September, the Venezuelan government modified the long-awaited bond swap offer it had first presented on 16 September, which had been in the offing for months. Under the revised terms, the government plans to swap USD 5.3 billion in bonds to ease the debt burden of both the Maduro administration and the state-owned oil company PDVSA (Petróleos de Venezuela, S.A.) before nearly USD 15.0 billion of bond payments come due in the next 14 months. Nevertheless, the debt swap fails to mend the structural imbalances afflicting the economy and will contribute to increasing the country’s debt burden.

The swap originally proposed by the government on 16 September envisaged allowing bondholders to trade USD 7.1 billion of PDVSA bonds due in October 2016, April 2017 and November 2017 for new bonds maturing in 2020, with amortization payments over a period of four years. In late September, Venezuela tweaked the original offer to lure more bondholders, offering 50.1% of PDVSA’s U.S. subsidiary Citgo Petroleum Corp. as collateral to make the swap less risky for them. The amount of bonds to be exchanged was reduced to USD 5.3 billion so fewer creditors would have to fight over Citgo’s assets in the case of a default.

After the original proposal had proved unappealing, the market reaction was more positive the second time around and PDVSA and Venezuelan bonds rallied to a two-year high. However, PDVSA extended the bond swap deadline in early October from 6 October to 12 October since bondholder participation was below the 50% participation threshold, highlighting a lack of sufficient interest in the swap. Despite the improved swap terms, most analysts remain skeptical about the plan.

Using Citgo as collateral is problematic for bondholders because it is PDVSA’s main asset that will be seized if it defaults and creditors would be fighting to claim their part of the collateral. Analysts are struggling to accurately value the assets of Citgo. Current valuations range from zero to nearly USD 10 billion and the company is facing numerous lawsuits for non-payment after the government depleted the firm of funds.

Credit rating agency S&P Global Ratings said that even if the swap was successful, it would be considered a formal default since it would be a “distressed exchange” between PDVSA and bondholders since the terms of the swap are detrimental to their interests.

The bond swap will not mend the economy’s structural imbalances either. Instead, it is seen as a measure by the government to buy time in the hope that oil prices will recover to a point where they can improve the country’s finances. The Venezuelan government remains determined to honor its international debt commitments in order to avoid asset seizures and prevent it from losing access to the international financial markets in the midst of a foreign currency crunch in the country. In a context of dwindling international reserves, doing so could however also aggravate scarcity of consumer goods and fuel social unrest in the country.

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