Archive for June 12th, 2009

As Government ponders PDVSA bond, S&P downgrades PDVSA

June 12, 2009

For the last six weeks, there have been rumors that PDVSA was ready to issue some US$ 2 billlion in bonds expiring in 2012 and 2014. But then, Chavez announced the nationalization of PDVSA services companies and the country’s and PDVSA’s bonds dropped sharply, postponing the issuing.

Rumors resurfaced as credit conditions improved around the world and local newspapers reported that last weekend Chavez actually approved the bonds and there would be an announcement soon. All of these rumors have helped contain the parallel swap rate, despite the fact that many people, including me, thought this was unnecessary and dangerous. Unnecessary, because if PDVSA needs money, it should be able to issue a local bond that would soak up local liquidity in Bolivars and not a dollar bond, which could turn out to be more expensive down the line. Because what PDVSA needs is Bolivars to pay suppliers and its local expenses, not dollars.

Unnecessary, because these issues have turned out to be only a psychological tool to keep the market down, but once they come to market, it is atomized so much among thousands of local investors, that the companies that need dollars for imports don’t get much and they have to go back to the swap market and push the rate down.

But this was also unnecessary, because I do not believe that international markets can absorb US$ 2 billion of additional PDVSA debt. While world markets have improved, this would create an oversupply which would have the same effect that the US$ 7.5 billion PDVSA 2007 issue had on the whole market for Venezuela’s debt. It brought the whole curve down, punishing down prices for months.

But rumors continued despite the skepticism and press reports that even some Cabinet Ministers were opposed and that the National Assembly did not want it to be a wasted effort.

But the possibility of the bond coming to market was likely short-circuited today when S&P downgraded PDVSA’s ratings from BB- to B+ (BB means the company/country may be facing conditions which may lead to the company having inadequate capacity to meet its obligations, while B means that it is more vulnerable than BB and that adverse conditions will impair the company’s ability to pay).

To make the downgrade more intriguing, S&P downgraded PDVSA, but reiterated its rating of BB- on Venezuela. While I disagree with some of the things said by S&P in its press release, particularly on the differentiation between the country and the company, this really thows a monkey wrench in the Government’s plans to issue bonds.

First, these are the main three reasons cited by S&P for the downgrade:

– PDVSA’s liquidity tightened due to the decline in oil prices at the  end of 2008 and continued tax payments to the government.
— In our opinion, there is heightened uncertainty regarding the  company’s willingness to meet its contractual obligations with some of its  suppliers.
— The negative outlook reflects what we believe to be heightened  uncertainty regarding PDVSA’s liquidity and its willingness to meet its  obligations with suppliers, as well as the negative outlook on Venezuela.

First, some of you may wonder about the timing, but clearly S&P was waiting for the audited financials to come out before it issued its opinion. Thus, while lower oil prices could have been used as an argument, S&P clearly waited for the full numbers which came out last week.

S&P argues that PDVSA’s  financial information is problem, it argues: “its more aggressive financial policy, and the continued delays in  the release of its financial information” . Well, I am not sure the country’s numbers are much better, but S&P gives them more credibility. It also suggests: “The ratings assigned to PDVSA also reflect the inconsistencies observed  in its reported production figures versus those from other sources”

What I can not agree with is S&P’s argument that somehow PDVSA would act independently of the Government and in the words of S&P: “Given our expectation that  the company could prioritize transfers to the government before debt payments  in a distress scenario.”

Sorry, I don’t buy that. In fact, PDVSA owns CITGO in the US, making it more unlikely (in my mind) to decide to pay for its debts than the country.

But S&P’s ratings confirm some of the uncertainty that the publication of its financials has created, as reported in the previous post, as well as the fact that the company is badly run, deciding not to pay suppliers and facing a cash crunch, which is dangerous because in the words of S&P: “We believe that PDVSA’s cash position has  decreased significantly during the last few months and that it has minimal  committed credit facilities available

Thus, the stretching of PDVSA’s resources and the irresponsible way in which it is being mismanaged will now not only make it more expensive to obtain financing, but will interfere with the plans of both PDVSA and the Government.

Remarkably, Ramirez and Chavez continue nationalizing companies and assigning tasks to PDVSA that have nothing to do with its mandate. Chavez even boasted when he was in Brazil that he had plenty of money to continue nationalizing those companies that his Government considered “strategic” to its objectives. Well, maybe he is not being told the truth…

Well, if the goose has no liquidity, and the wild spree of wealth destruction continues, Chavez may find that the money he spent in propping up his popularity with his right hand, may have been wasted by the irresponsible way he has been running the country with his other one.

Follow

Get every new post delivered to your Inbox.

Join 11,813 other followers