Caracas Chronicles

On Friday, PDVSA offered a voluntary bond swap aimed at reducing its 2016-2017 debt payments. Instead of paying back the bonds that mature next year, PDVSA offers to pay back the capital (plus a bit of extra interest) in four cómodas cuotas (amortization payments) between 2017 and 2020.

If bondholders were looking for a pile of easy money at the end of this rainbow, they’ll have been disappointed. The terms aren’t very favorable from their point of view. We’re guessing plenty of bondholders are looking through Facebook and just itching to flick PDVSA the finger in comments.

Here’s the deal. Say you hold one of PDVSA’s two bonds that mature in 2017 – one in April 2017 and the other in November  (ojo, the November 2017 one also has a capital payment in November this year). PDVSA is offering to trade you those old bonds for a shiny new bond maturing in 2020. This new 2020 bond will be issued only for PDVSA to swap for its two 2017 bonds; not to get fresh cash.

A 1:1 ratio is just not that attractive.

The Swap ratio is 1:1. You give PDVSA $100 worth of any PDVSA 2017 bond and they give you $100 worth of the new PDVSA 2020 bond.

That means the total amount PDVSA owes won’t increase. (OK, when you get deep into the weeds you find this isn’t strictly true — interests are higher with the new bond. The ratings agencies would’ve thrown a shitfit if the net present value of the new bond wasn’t at least a little higher than the old one. Still: PDVSA’s total liabilities won’t increase much.)

So, are lots of private bondholders going to rush to get in on this deal?

Nobody seems to think so.

A 1:1 ratio is just not that attractive. PDVSA is basically just asking for more time. They’re asking bondholders to stick it out with them over what look to be three highly turbulent additional years. Years when Venezuela is very likely to witness massive political upheaval, where the basic rules of the economic game are up for grabs. And they’re not even going through the motions of promising to reform the chaotic way PDVSA is managed, or the economy.

Instead of extra money, PDVSA is offering 50.1% of Citgo Holding Inc.’s Common stock as collateral.

You’d have to offer a pretty big dollar premium to tempt bondholders to go for a deal like this. But they didn’t. Early conclusion: relatively few bondholders are going to go for it.  

Instead of extra money, PDVSA is offering 50.1% of Citgo Holding Inc.’s common stock as collateral. That’s pretty thin gruel: who’s to say PDVSA won’t strip out all the assets from Citgo ahead of a 2020 default? Or saddle the company with so much debt that the equity guarantee becomes basically worthless? This weekend any number of bond analysts will be looking closely at the fine print of the Swap prospectus to try to figure out the gory details. But on a first approach, the Citgo collateral doesn’t look that great.

For one thing, Citgo itself is probably not worth more than about $6 or $7 billion, which makes 50.1% of Citgo worth maybe $3-$3.5 billion…not a great guarantee for a $7 billion bond. And that’s what Citgo is worth now: what matters is what it’ll be worth in 2020.

On the other hand, the new PDVSA 2020 will be the only Venezuela or PDVSA bond with any kind of collateral. So while the guarantee isn’t great, some investors may still reason that something is better than nothing.

From bondholders’ point of view, it’s a bit of a prisoner’s dilemma.  

The details are, well, detailed, but the big picture is that this isn’t some kind of wild giveaway to Wall Street.

That’s good from a Salvaguarda point of view: we were worried that Swap terms were going to be terrible for the Venezuelan taxpayer, and they aren’t. The flip side is that since it isn’t a piñata for foreign capital, relatively few foreign capitalists are likely to go for it.

From bondholders’ point of view, it’s a bit of a prisoner’s dilemma: each one of them would be best served if all the other bondholders took the deal, but not them.  Of course, if all of them think this way, nobody takes the deal. There’s a non-negligible risk the whole offer just bombs. Alternatively, maybe PDVSA doesn’t need that many bondholders to go for it to score the deal a success.

Basically, one of two things is happening here.

Either,

#1. PDVSA is miscalculating. The government doesn’t want to open itself up to political attack for fattening up PDVSA’s debt, so they’re gambling but gambling really badly. They’re thinking the Citgo collateral offer is going to be attractive enough to lure a significant number of bondholders into swapping, but they’re wrong. In this scenario, PDVSA wants to eat steak but it doesn’t want to butcher the cows: that’s why they left it to the very last minute, that’s why we got that mamarrachada of a swap announcement on Facebook. Mamarracho is as mamarracho does. In this view, the bondholders will turn their noses up at the offer, and PDVSA is going to be screwed, unable to meet its payments this year or next.  

or,

#2. PDVSA isn’t that deep in the hole. Having already bought back quite a lot of their own bonds, they just need a little bit of help making up the remaining 2016 and 2017 shortfall. So they decided “well, screw the forks, no sense giving them a plump deal: we only need a couple of fish to bite.” That’s why they purposefully put together a not-very-attractive swap offer, calculating a few bondholders will go for it, and that that’s enough.

So which one is it? #1 or #2? It’s too early to tell, and the Caracas Chronicles team is frankly divided.

On the one hand, chavismo miscalculates so often about so many things, it’s always dicey to think just this once they’re making a cunning strategic move. It’s easy enough to imagine some chavista politician pigheadedly insisting that The Swap™ is going to be a hit, just because, even though all the experts keep telling them the conditions clearly don’t warrant it. And the conditions clearly do not warrant thinking The Swap™ is going to have a lot of buy-in. Which is why some members of the team are adamant it has to be #1.

On the other hand, the information asymmetry here is profound: PDVSA’s finances are really opaque, the company knows much more about its situation than we do, just because they never publish anything. They have tons of expensive advisors, and it’s hard to believe they could run with an offer like this genuinely not realizing that it wouldn’t serve their goals. Which is why some members of the Caracas Chronicles Team are committed #2ists.

So, which one is it?

We’ll find out soon enough.