Debate on PDVSA bond swap

For investors in Venezuela’s state-owned oil producer, its sweetened bond-swap terms are outweighing Congress’s threat to question the deal.

For investors in Venezuela’s state-owned oil producer, its sweetened bond-swap terms are outweighing Congress’s threat to question the deal.

Petroleos de Venezuela SA’s $4.1 billion of notes due in November 2017 have climbed 9.4 percent to a two-year high since Sept. 26, when the cash-strapped company said it will pay holders as much as 1.22 times the face value of the bonds in exchange for longer-maturity securities. The new notes will still be backed by a 50.1 percent stake in U.S. oil refining unit Citgo Holding Inc.

The rally took place even after Congress summoned PDVSA President Eulogio Del Pino to explain the deal, said it opposed the inclusion of Citgo as collateral and called for a further investigation. The warning comes as the national assembly has stepped up efforts to remove President Nicolas Maduro from office in the face of a collapsing economy. In March, it warned that international financing deals struck by Maduro’s government without congressional approval would be null and void.

“If the market viewed this as a big risk, we wouldn’t see prices where they are right now,” said Roy A. Ellis, the chief executive officer of Silk & Co., a Bogota-based private investment banking firm. “The market is fully discounting this as political noise that doesn’t have any relevance.”

While the government hasn’t announced any new loans from China since the warning from Congress in March, Venezuela’s bonds have risen more than 50 percent since, according to the Bloomberg USD Emerging Market Venezuela Sovereign Bond Index. Over the past decade, Venezuela has relied on China for financing in return for oil.

“The refusal of new loans from China and other countries is due to violations of the constitution and for not sending contracts in the national interest to the national assembly for approval,” Congress President Henry Ramos Allup said in a Twitter post Oct. 1.

Venezuela’s Finance Ministry declined to comment when asked about when new funding from China could be coming. The national assembly has seen most of its initiatives overturned by the Supreme Court since the opposition won a majority of congress in elections last year.

As part of PDVSA’s revamped swap offer, the company also reduced the amount of bonds it plans to exchange to $5.325 billion from $7.1 billion.

While PDVSA is generally exempted from national assembly oversight because of its status as a separate company, the addition of Citgo as collateral creates a legal gray area, said Russ Dallen, a managing partner at Caracas Capital.

“Caveat emptor,” he said. “I don’t believe the swap will be successful for this and other reasons. I think the rally in Venezuela and PDVSA debt is more the result of low liquidity and low bond inventory resulting from investment bank traders not wanting to be too long and too wrong in this credit than any market optimism over the deal.”

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