This week, PDVSA announced yet another bond to be issued in the international markets. This time, a 6% coupon bond which matures in 2024, will pay one third of it in 2022, one third in 2023 and the final maturity in 2024. This is not your usual bond issue, PDVSA said that it would sell it to Government-owned public banks (which I take it includes the Venezuelan Central Bank) in exchange for Bolívars. And just like everything the revolution does, things get complicated, because with the many exchange rates in existence in Venezuela, the only thing we can be sure about is that it will not be sold at the parallel market rate, but one of the three rates sponsored by the Government, the Cencoex rate (Bs. 6.3 per US$) the Sicad 1 rate (Bs. 10 per US$) and the Sicad 2 rate ( Bs. 49.99 per US$ or some silly number similar to it, with decimals and everything)
You see, legally, PDVSA can not sell this bond at any rate different than the Bs. 6.3 per US$ rate to the Government owned commercial banks. That is what the foreign exchange agreements between the Government and the Venezuelan Central Bank (BCV) say. Under those agreements, PDVSA can sell dollars either at Bs. 6.3 per US$ or at Sicad 2, where it can sell dollars that did not come from producing oil. But clearly, this is not the case, PDVSA will not sell the bonds directly to Sicad 2, which is what it would need to do.
Thus, at first glance, it would seem as if the bonds will be sold to the banks at the Cencoex rate. Of course, Chavismo can simply ignore the law, it would not be the first time.
Now, PDVSA or the Government did not say anything else about the plans for this bond. Because, among many theories, the bonds could be sold in Sicad 1, Sicad 2 or they could be given by Cencoex to sell to those importers that are owed money from 2013. In all hypothetical cases, the bonds will be sold differently. For Cencoex, an importer would have to accept a discount. You see, the bond pays 6% per year, but Venezuela bonds trade at roughly a yield to maturity of say, 13% around 2024, so that the bond in US$, if sold today, would trade around 60% of its face value. This means, that if someone was paid with it, they would only receive 60% of its nominal value.
I don’t know many importers which would accept such an offer, but you never know…
(It also means that the 30% payment to importers would go down to 18%, not an effective solution in my book to this problem)
Now, suppose you are a Government-owned bank and your bank is given US$ 50 million at Bs. 6.3 per US$. If you sell it at the Sicad 1 rate, you will get Bs. 10 per US$ nominal value. Your bank makes a tidy Bs. 3.7 per US$, you bought at Bs. 6.3, you sell at Bs. 10. That is a nice 58% profit for doing nothing.
But there is a better deal. If you sell the bonds in the Sicad 2 system, you will sell the cash value of the bonds (60% of nominal value) at Bs. 50 or an effective Bs. 30 per US$ that you purchased for Bs. 6.3 per US$. That is a Bs. 23.7 profit per US$, almost 400%… (Who cares about decimals, no?)
Only in Venezuela…
So, what’s a bank’s President to do? Supposedly, they will follow orders, to sell x per cent in Sicad 1 or y per cent in Sicad 2. But do you really believe that this uncoordinated, mismanaged, every-man-for-himself Government will or can keep track on what happens to all these bonds? I don’t. I think there is an order to sell in Sicad 1, but soon every bank will do whatever it pleases its President, not Ramirez or Maduro.
But think about it. PDVSA, the issuer of the bond, is getting little benefit from it. It now has more debt at US$ 48 billion, but the apparent beneficiaries of the bond are the local banks and the BCV that sell it into Sicad 1 or Sicad 2. Moreover, PDVSA is issuing it with such a low coupon, that even if it is a bond issued only to satisfy the bizarre foreign exchange system of this Government, it only really generates about US$ 3 billion out of a US$ 5 billion issue in real money that can be used by importers.
But it does little to help PDVSA with its investments or its huge (and increasing!) debt with the Venezuelan Central Bank. Nor dos it help the company in its investments needs, it only allows the revolution’s stupid and increasingly dumb and complex foreign exchange system to survive a little longer.
In fact, think about it, PDVSA seems to be more worried about annual coupon payments, taking a 50% discount on it with the low coupon, than in the final payments in ’22, ’23 and ’24, which only take a 40% cut. Maybe they are not even sure they will be around to pay at that time, and are throwing another Hail Mary pass at the revolution’s survival.
And thus PDVSA becomes the oil company with the second highest debt in the world (after Pemex) except that the money is in Bolívars and will have little impact on PDVSA’s production, as the debt is only being issued to help the revolution survive.
As to the debt, PDVSA’s or Venezuela’s, it has gone up too much for my taste.Foreign investors really believe there is some form of pragmatism in Maduro’s Government. If Ramirez is the pragmatist, God help Venezuela! I don’t think Venezuela or PDVSA needs to default, but you never know with these guys. I would wait again until yields get to 18% or so before buying. The bonds could lose 15% again at anytime like they did in February, given the Government’s policies. To get that risk and volatility, I have to get paid, 13% yield just does not cut it. There will be a good buying opportunity, Argentina does seem to have real pragmatists to park the money in the meantime.