December 15, 2017 / 10:09 PM / 2 years ago

Venezuela default more likely on sovereign bonds than PDVSA's: bondholders

NEW YORK (Reuters) - Venezuela is more likely to default on its sovereign bonds than on those of state-run oil company PDVSA given how essential the latter’s cash flow is to the country’s fortunes, bondholders and legal experts have said.

Both asset classes cratered last month after President Nicolas Maduro told creditors that Venezuela wanted to restructure its foreign debt, which includes some $60 billion in bonds issued by PDVSA PDVSA.UL and its owner, the Venezuelan government.

The oil Petroleos de Venezuela SA (PDVSA) produces is the country’s primary export and means of generating income. A default by PDVSA could leave its assets outside the country, mainly its U.S. refiner Citgo Petroleum, vulnerable to seizure.

“If, on the one hand, the Venezuelan government is intent on doing everything it can to protect PDVSA’s assets and, on the other hand, the country does not have the resources to service the debt of the Republic as well, one could imagine them deciding to continue to service the PDVSA bonds and cease payment of the republic bonds,” said Mark Walker, managing director and head of sovereign advisory at Millstein & Co.  

“That said, we really do not know what the government’s strategy may be,” said Walker, who has been in informal discussions with creditors about the next potential steps after Maduro’s call for a debt restructuring.

Eight different investors and legal experts contacted by Reuters in recent days agreed that the PDVSA bonds were a safer bet than the sovereigns.

The Venezuelan government may soon be running low on cash, forcing it to make some hard decisions. Its crude output dipped last month to the lowest level in nearly three decades, producer group OPEC said. And about two dozen high-level PDVSA executives have been arrested in a major corruption sweep, ridding the company of much of its top brass.

“I have a hard time seeing them making sovereign payments next year,” Francisco Rodriguez, chief economist at hedge fund Torino Capital, said during a panel discussion on Venezuela sponsored by the Americas Society/Council of the Americas in New York.

Rodriguez noted that about 90 percent of Venezuela’s foreign exchange capacity comes from PDVSA.

Adding to the attractiveness of owning PDVSA’s rather than government bonds is that the oil company’s bonds do not include collective action clauses, or CACs. CACs allow a debt restructuring to go ahead with authorization from 75 percent of participants, binding any dissenting creditors into the process.

The majority of outstanding Venezuelan government debt (12 out of 14 issues) have CACs attached.

A group of about 200 bondholders who met most recently in London are unsure about how Venezuela will proceed, but those who consider a default to be imminent generally believe it will be in the sovereign issues rather than in PDVSA, according to sources familiar with the meeting.

The upcoming payments for PDVSA’s bonds over the next year are also lower than those owed on the nation’s sovereign bonds - $6 billion in sovereign payments versus $2.9 billion for PDVSA - perhaps providing Venezuela time to rebuild cash reserves without igniting an all-out war with creditors.

There has been little sign of this view being reflected in any kind of premium for PDVSA bonds over the Venezuelan sovereign, with both generally trading at around 20 cents to the dollar, with the exception of the oil company’s 2020 bonds, which are explicitly secured by a stake in Citgo.

The uncertainty about what will happen next with Venezuelan debt in general has been exacerbated by U.S. sanctions - preventing further debt from being issued and therefore making a restructuring impossible - and Venezuela’s economic collapse.

Still, the view that PDVSA debt would be a better bet than the sovereign is far from unanimous, with some investors saying the country’s situation is dire enough that there’s little upside in either.

“We don’t own any Venezuela debt and I think differentiating between the sovereign and PDVSA bonds is like rearranging the deck chairs on the Titanic,” said James Barrineau, co-head of emerging market debt at Schroders Investment. “This is a hyperinflationary economy that’s spiraling downward at a rapid rate and oil production is imploding.”

The situation is far worse than in other countries that have gone through debt restructurings, such as Argentina, Ecuador, Greece or Ukraine, both Barrineau and Millstein’s Walker said.

“This isn’t going to be an Argentina type of situation,” said Barrineau. “It’s going to be vastly more complex.”

Reporting by Dion Rabouin; Editing by Christian Plumb and Susan Thomas

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