October 28, 2016 / 4:10 PM / 10 months ago

Investors find little joy in PDVSA swap

NEW YORK, Oct 28 (IFR) - State-owned oil company PDVSA struggled last week to get bondholders on board with a debt exchange that may have won it some temporary cash flow relief, but did little to dispel fears of a looming default in the next 12 to 18 months.

Despite multiple deadline extensions and some strong arm tactics, creditors tendered just US$2.8bn of outstanding 2017s for about US$3.37bn of new 2020s backed by shares of PDVSA's US unit Citgo.

The value of bonds tendered accounted for just 39.43% of the aggregate principal amount of the 2017s, putting PDVSA short of its participation target of 50%.

"It is hard to escape the fact that the participation rate was far less than they had anticipated, and the market can't help but take that negatively," said Dylan Parker, a trader at broker Torino Capital LLC.

PDVSA's decision to complete the exchange even after the participation rate fell short of expectations was viewed by some as an act of desperation.

Fallout from the lackluster response was also exacerbated last week by violent protests over the suspension of a referendum to remove President Nicolas Maduro.

Those who held the new 2020s saw it drop from a high of around 77.50 on the break to 71.75-72.00 on Thursday.

"The problem is that we don't know where this is heading," said Siobhan Morden, head of Latin America fixed-income strategy at Nomura. "If we knew Maduro was leaving, we would be buying on weakness right now."

The fall in the 2020s was because investors were all too happy to take profits, after enjoying an over 10 point rally on some Venezuelan bonds since August, in an uncertain political and economic backdrop.

For some the exchange may have bought some short-term relief but they fear it won't be long before payment pressures start building again.

The liability management transaction cuts bond payments by US$1.9bn until the end of 2017, but the new security soon adds another US$1bn in annual payments between 2017 and 2020.

DISTRESSED

The rating agencies were quick to call the exchange distressed, with S&P noting that investors would receive less than what was promised on the original securities.

With reserves dwindling to around US$12bn and little if any access to hard currency funding, PDVSA and the government are likely to struggle to cover maturities over the next year.

"Over the last six months reserves have flatlined," Richard Briggs, an emerging markets credit strategist at CreditSights, told IFR.

"They managed to get enough dollars to pay interest but didn't have big maturities over that period...but it is very difficult to see how they get past 2017."

Most investors think the company will pay a US$1bn principal payment due on October 28 on the 2016s and what is now a US$1.12bn amortization payment for 8.5% 2017s due on November 2.

"(The president of PDVSA Eulogio Del Pino) confirmed they would pay on the 2016s," Parker said.

"He stopped short of saying they would pay the amortization payment on the 2017s (this year). But the exchange should provide enough (relief) to get through that."

But doubts are growing about a US$2.06bn payment in April on PDVSA's 5.25% 2017s and a final amortization of US$1.12bn due November 2017 on the 8.5% 2017s.

"The lack of visibility regarding the company's investment and comprehensive refinancing plans exacerbates (PDVSA's) probability of default or debt restructuring in the next 12 to 18 months," Moody's said.

Analysts are predicting that it will be a close call next year as the sovereign seeks to cover billions of dollars in liabilities.

Morden calculates that both the sovereign and PDVSA face some US$41.158bn in liabilities between imports, debt payments and service deficits.

That compares to US$39.24bn in potential assets that come from exports, a reprofiling of Chinese debt, some liability management and gold reserves.

"It remains an extremely difficult year next year after exhausting one-off financing options and already compressing imports by 50% this year," wrote Morden. (Reporting by Paul Kilby; Editing by Shankar Ramakrishnan and Matthew Davies)

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