(ADDS downgrade, UPDATES levels)
By Paul Kilby
NEW YORK, Sept 19 (IFR) - The 2017s issued by Venezuelan oil
company PDVSA were closing Monday off intra-day lows, even as
investors shunned the terms of a debt exchange targeting
US$7.1bn of those securities.
The 5.25% 2017s were ending the day at around 73.00 after
hitting 71.75 earlier, while the 8.5% 2017s were back up to
77.30 after slumping to a 76.50 bid in the morning.
The 5.25% 2017s closed on Friday at 75.125, while the 8.5%
2017s ended last week at 79.40.
That followed S&P's announcement that it had downgraded
PDVSA to CC from CCC, after calling the transaction a distressed
The rating agency warned it would lower the rating on the
2017s to D on completion of the operation, which it said would
delay payments on the existing notes.
"We view the offer as distressed rather than purely
opportunistic, given the current challenging operating
conditions and the significant upcoming debt maturities that
PDVSA faces," the ratings agency said.
PDVSA President Eulogio Del Pino said earlier this month
that the new bond had been given a positive evaluation by three
If successful, the long-awaited liability management
operation would give the beleaguered oil exporter some relief
from a wall of maturities falling due over the coming months.
Yet while a good chunk of the 2017s are thought to be held
by compliant government entities, PDVSA will likely need to
bring in a critical mass of foreigners to get past the 50%
participation rate set by the company.
"The swap looks like it would be more appealing to locals
than foreign investors, given the 1:1 ratio in addition to the
uncertainty over the value claims on Citgo," said Sean Newman,
senior portfolio manager at Invesco.
PDVSA announced Friday that for each US$1,000 in principal
of existing 2017s, bondholders would receive an equal amount of
new 8.5% amortizing 2020s, backed by a first-priority interest
on 50.1% of capital in Citgo Holdings.
After the early bird deadline of September 29, however,
holders will receive US$950 of new notes for every US$1,000 of
old securities exchanged.
"The market was expecting a ratio of 1 to 2 or 1 to 3," said
a fixed-income analyst. "The rating agency would have left
ratings alone on an exchange ratio of this type."
But the initial par-for-par offer disappointed many market
participants, who said a higher ratio would be required to make
the transaction NPV-positive for holders.
"It is difficult to get past the fact they are asking for 1
to 1," said Siobhan Morden, head of Latin American strategy at
"They are starting with an NPV negative (transaction) and
are looking to the Citgo stock to compensate. That is a
difficult starting point."
How accounts value the Citgo pledge will likely make all the
difference when holders are deciding whether to participate or
That could prove difficult, given that Citgo operating
shares have already been pledged on an earlier bond offering
form the US based borrower.
While Invesco's Newman puts a rough value of the Citgo claim
at 50 to 55 cents on the dollar, holding the stock comes with
legal risks should PDVSA default.
"You enter a real legal jungle on who gets priority claims
on Citgo relative to holders of its debt," he said.
"And you face possible lawsuits from existing PDVSA holders
who may think they have similar claims on the assets."
Credit Suisse is acting as financial advisor on the exchange
(Reporting by Paul Kilby; Editing by Marc Carnegie)