Caracas Chronicles

While all eyes are in the streets and in Maduro’s latest kamikaze move, the Venezuelan default clock keeps ticking. Even if the government manages to crush the opposition once more, that would likely solve little on the financial front in the short term. The government needs cash to keep making debt payments this year, and that’s why the two controversial TSJ rulings gave (or tried to give) Maduro powers to raise foreign money without bothering with the National Assembly.

So far, the main adjustment variable in the government’s balance sheet has been people’s stomachs: cutting imports drastically, including those of food and medicines, triggering the worst humanitarian crisis since the middle of the 19th century.

But all those kilos lost by hungry Venezuelans won’t be enough to balance the books. The government will have to dig deep, scrape the bottom of the barrel, to come up with the money they need, whether by selling its few remaining assets, or using them as collateral in loans or in repos. As you’ll see below, with the only exception of the foreign reserves, all options involve selling assets at basements prices, or pawning off at deep discounts, and on top of that, most operations would take some time to complete.

This is what’s left.

Gold

The government started selling the Central Bank’s gold reserves in the last quarter of 2014, and has so far sold around half, going from 367.6 to 187.5 tonnes. The remaining gold is worth around $7.5 bn. A good chunk of that gold — we don’t know how much — is stored in the Central Bank’s vault in Caracas, so it will have to be transported abroad to be monetized, and might have to be certified for purity. That shouldn’t take much time if the government is in a rush; a few weeks, at most, and it looks like it may already be happening.

Non-gold reserves

The Central Bank reports $10.1bn in total reserves, including gold. That leaves around $2.6bn in non-gold reserves (the exact number depends on the price of gold used by the BCV). That’s composed of cash, or liquid assets. It includes the roughly $425 million in their IMF account; what’s left after withdrawing around $2.5bn since 2015.

Money Owed by Petrocaribe Recipients

The government already cashed its receivables from Dominican Republic and Jamaica. The countries paid their outstanding debts upfront — which were supposed to be paid over 25 years — in exchange for a generous discount. Combined, these countries owed Venezuela $8.2bn, which they settled for $3.9bn. These were the only countries able to settle their debts in the short term; the rest of the debt is by small countries with no chance of raising the money to pay now.

The two big amounts outstanding, by the end of 2015, where from Nicaragua ($2.7bn) and Cuba (over $10bn). Good luck collecting that money anytime soon; and collecting in cash, not in “doctors” or beans.

Random banks

Venezuela has random stakes in banks in Uruguay, Russia and Colombia, which it could also monetize. Venezuela’s “development bank” BANDES capitalized a bankrupt Uruguayan bank over a decade ago and thus BANDES Uruguay was born. BANDES Uruguay has about $430 million in assets, $41 million in equity, and earned less than $2.5 million in 2014-2015. This puts the bank’s value at $100 million, tops.

Venezuela also owns a 49.99% non-controlling stake in Evrofinance Mosnarbank, a medium sized bank in Russia (ranked 24th by assets). The bank has about $800 million in assets, $200 million in equity and $5 million in earnings. This would value Venezuela’s stake at roughly $300 million, if we’re generous.

CITGO and other oil assets abroad

Yes, the government might still be able to sell CITGO, even after using half of its shares as collateral in a bond swap, and pawning the other half to Russia. Whether CITGO can be sold or not likely depends on the fine print in the Russian deal. If it can be sold, the value of the heavily indebted company would be nowhere near the reported $10bn the government turned down three years ago or the lowest bid it reportedly received of $7bn.

There are other, smaller oil-related assets that could be sold, such as stakes in refineries in the USA, Jamaica, Cuba, Dominican Republic and Sweden. These are small refineries: their combined capacity is less than 12% of the capacity installed in PDVSA’s three refineries in Venezuela (see page 63).

Whatever the BCV holds in bonds from PDVSA

Every now and then, the Central Bank reveals it’s holding a lot of obscure PDVSA bonds that have never made it to the market. These bonds make their way to BCV in convoluted operations, usually involving the state-owned Banco de Venezuela as a useful partner. In April, the BCV pawned off PDVSA 2022 bonds with a face value of $1.3bn to a salivating vulture fund for just $300 million in cash. As far a we know, the bank still has about $1.7bn left from that bond, that if pawned at the same rate, could raise around $400 million.

There’s also the VENZ 2036 bond with a face value of $5bn, issued in a rush by the government and sold to Banco de Venezuela before turning the National Assembly over to the opposition in late 2015. It’s a very weird bond: they used a Chinese bank for the issuance, and the bond was delivered in physical paper. That sort of thing is not used anymore in financial markets. Bonds are dematerialized; i.e, just an entry in a software database. We don’t know who’s holding that bond now, and if it’s a government agency, whether they can squeeze cash out of it. If pawned at the same rate as the PDVSA 2022, it would raise $1.15bn in cash.

These bonds make their way to BCV in convoluted operations, usually involving the state-owned Banco de Venezuela as a useful partner.

We could add here the Venezuelan bonds held by state-owned banks and PDVSA’s pension fund, which could amount to a few billion dollars, depending on which bonds are held and in what amount. Rumor has it that the government prefers to buy-back short-dated bonds on the open market, so a large chunk of their holdings likely already matured. If the regime holds long-dated bonds, it could sell them at current market prices (at deep discounts) or repo them like it did with Fintech – in both cases, a horrible deal.

Stake in oil joint-ventures

According to the law that regulates the oil sector in Venezuela — the Hydrocarbons Law — the State must hold more than 50% of the shares in oil exploration companies in the country. From the point of view of our bankrupt government, this means they can sell part of their stake in the joint-ventures where they currently hold more than 50.00001%.

In 2016, Rosneft paid $500 million to increase its stake in Petromonagas from 16% to 40%. PDVSA also offered Rosneft a 10% stake in Petropiar, where Chevron already holds 30%. PDVSA holds stakes of around 60% in several JVs: Petrocedeño, Sinovensa, Petroboscan, Petrodelta, Petrozamora, Petrocabimas, Petromiranda and Petroquiriquire, just to name a few (see page 53 here). That’s a lot of ten percents that can be sold.

Fortunately for the government, these sales don’t require congressional approval. However, changing the Law to lower the 50% requirement to sell larger stakes would require congressional approval, even if the recent TSJ rulings say it doesn’t.

The foreign partner can front all of the money to actually start pumping oil and “pay itself back” through the 51% of the JV’s cash flow that belongs to PDVSA.

PDVSA can also enter new joint ventures. This, of course, assuming PDVSA finds a foreign partner comfortable with entering a JV agreement not approved by the National Assembly (which must approve it, per the constitution) but approved by the phony Supreme Court instead.

It doesn’t matter that PDVSA is bankrupt and can’t put a cent down in the new project. The foreign partner can front all of the money to actually start pumping oil and “pay itself back” through the 51% of the JV’s cash flow that belongs to PDVSA. They have been doing that already with existing JV’s: Repsol came up with $1.2bn to boost output at their JV with PDVSA, Petroquiriquire, while PDVSA contributed with zero dollars.

But here’s the catch: Foreign partners will only enter into this kind of agreement if you sell them project equity at desperately low valuations. It’s a great big world out there of oil governments looking to raise money. And beggars can’t be choosers–especially if their JV’s aren’t even legal and the country has a rich history of expropriation.

CANTV, Electricidad de Caracas and Banco de Venezuela

Here’s where things get really, really interesting. This is where we’re heading if the Oil God doesn’t rise soon, or if China doesn’t come to the rescue of the revolution with its fat checkbook.

CANTV is by far the top telecommunications company in a country of 30 million people, with phone, mobile, internet and satellite TV services. When it was nationalized in 2007, the government paid $1.3bn to buy the shares it didn’t already own, valuing the company at around $2bn (the much maligned Cuarta República sold part of the company at a $4.7bn valuation in 1991).

Who’s going to buy these companies if they can’t later take their profits out of the country thanks to the exchange controls?

EDC, the only electric energy company serving Caracas and its 5 million inhabitants, was nationalized after the government bought out the largest shareholder with $740 million, which put the value of the company then at  $900 million. BdV was bought by the government in 2008 for $1bn. The government also owns a bunch of much smaller domestic banks.

Besides the gold, these are the most attractive assets not related to natural resource exploitation owned by the government. They could all be sold for good money. Problem is, who’s going to buy these companies if they can’t later take their profits out of the country thanks to the exchange controls? And for CANTV and EDC making profits is already a difficult proposition without increasing their government-controlled rates by a lot.

Selling these companies for a reasonable amount would require either lifting exchange and price controls, or including an exemption from the controls in the deal: the two things chavismo appears most unwilling to do.

In any country that’s not falling apart, we could include in this list of assets the airports and ports. But in Venezuela, those are not worth much to foreign investors when airlines are leaving the country, few Venezuelans can afford to travel, and the cut in imports have left Venezuela ports empty.

Guayana heavy industries

The crown jewels of the Venezuelan “basic industries” (as the heavy-industry ventures in Guayana are known) are another example of assets deeply damaged by the socialist hand. Under different conditions they would be worth a lot, but now require massive investment to turn around.

All three companies come with bloated payrolls, mountains of debt to its employees, and deteriorated assets after years of mismanagement under military officers.

Until its nationalization in 2008, steelmaker SIDOR was working at close to full capacity under private management. Then came our antihero The Expropriator and this happened. Production has dropped by 93% since the government took over the company; and even if we discount 2016 as a fluke (the factory closed for five months due to electric energy shortages), its output in 2015 was still 75% below its peak. Things are looking equally bleak at the aluminum smelters Alcasa and Venalum. A year ago, Alcasa was working at 15% capacity, and Venalum at 21%. All three companies come with bloated payrolls, mountains of debt to its employees, and deteriorated assets after years of mismanagement under military officers.

If you’re wondering how much they can get from SIDOR, the government paid the previous owners $1.97bn for their 59.7% stake in the company, thus valuing the company at $3.3bn. But that was for a well-functioning company, not the carcass of one.

If you’re keeping score, in this short article we’ve detailed how the government spent $5bn nationalizing four companies between 2007 and 2008. Now they might need to sell them, but won’t raise nearly as much.

Mining rights

The government has been trying to raise fund from selling mining rights along the Arco Minero, a mineral-rich area in the south of the country. They already inked a deal with gold-mining company Gold Reserve, which not long ago was kicking the government’s butt in US courts for compensation for the 2008 expropriation of their assets. Nine years after kicking them out, the government is giving them back the same mines, and more.

It’s not clear if the money put up front by Gold Reserve will be spent exclusively in the project, or if Venezuela might get some cash up front that can be used to pay foreign debt. So far, the Gold Reserve deal appears to be the only significant project to come to fruition from the government’s efforts squeeze cash out of the Arco Minero.

Savings in dollars held by the government

Just kidding. There’s nothing left.

Did we miss something?

Can you think of an asset we forgot to include? That’s what the Comment Section is for!