Petroleos de Venezuela SA, the Venezuelan state-owned oil and gas company, performed a debt for bond offer valued in $7 billion.
A debt for bond offer is performed when a company has to relieve some of its financial obligations by offering bonds to its investors in exchange for a predetermined amount of debt. Debts for bond swaps are usually performed to take a better standing in future changes of interest rates. In PDVSA’s case, the swap symbolizes a highly suspicious offer that has led investors to lose confidence in the company’s future, which is inherently linked to the future of the Venezuelan government.
PDVSA: The backbone of Venezuela’s economy
Hedge fund managers that accepted PDVSA’s offer depend on the outcome of Venezuela’s political and economic crisis. Maduro staying in power means that creditors will get a worse trade-off for their bonds.
Investors have chosen to go ahead and buy the government’s debt swaps as they expect Maduro will be replaced.
As the coalition of opposition parties gains legitimate strength to topple Maduro’s government, creditors benefit from holding the national oil company’s debt, by accumulating interest rates on their debt bonds.
Whenever the political scenario of Venezuela undergoes a major change, there will be important repercussions on the country’s financial assets. The opposition is aiming for a recall referendum to oust Maduro from the presidency, which is being pressured to occur in 2016.
A change in leadership is likely
If the referendum passes through the biased Venezuelan electoral council before this year ends, presidential elections would occur as soon as January 2017.
Because the opposition has managed to become a sizable political force in Venezuela, a president contrary to the PSUV, the governing socialist party founded by the late Hugo Chavez, would be the most probable outcome.
If the referendum occurs after January of the upcoming year, then the presidency will be retained by the current vice-president, which will allow the PSUV to negotiate with the opposition as the political panorama would have changed radically.
Another plausible scenario would be Maduro resigning his position, but this is highly unlikely as it would put many of his colleagues in precarious positions, including First Lady Cilia Flores, whose nephews stand trial for attempting to smuggle hundreds of kilos of cocaine while wielding diplomatic passports.
Investors believe there is a very high probability of Maduro not being the president anymore, and with the increased strength of the opposition displayed in recent protests and mass demonstrations of democratic values the future appears to be uncertain for the PSUV.
To keep afloat, the PSUV leadership must determine what would be the best course of action, and that may imply the removal of Maduro from power.
To take place, the recall referendum needs to be called upon by 7.5 million signatures to pass then on the final stage that would finally determine if Maduro is ousted or not.
The first stages of the referendum already passed, where the opposition called on the Venezuelan population to undergo a first signing process. The Venezuelan electoral committee then forced a second stage where signers had to verify through a fingerprint scanner that they had indeed signed the first time.
The opposition argues that these steps were made intentionally cumbersome but even so, they managed to rally 2.5 million signatures on the first stage when they only needed just over 500,000.
The electoral council then called for the verification of the signatures, providing just a handful of machines and enabling the process for just five days. Venezuelans attended again at the call and managed to complete each stage of the referendum request.
PDVSA and Maduro try to make ends meet
Because there are many factors that will guarantee Maduro’s removal, PDVSA’s bonds are not looking too good for investors. The initial offer stands at $1000 of PDVSA before September 29, which will be fully reimbursed by April 2017.
Although it is an attractive offer, it will be for credit way after Venezuela’s political scenario radically changes. S&P set PDVSA’s credit rating to ‘CC’ as it aims to accommodate its debt notes by 2020, guaranteeing payment with 50.1 percent of shares in Citgo, PDVSA’s most important international branch.
Venezuela relies on oil revenue to survive, as its remaining imports have dropped to basically zero and its local production is critical, leading to food shortages and political turmoil.
Analysts believe that, if the debt swap fails, there is a high probability of PDVSA having to announce a default over the course of 2017. The rate for investing on PDVSA not reaching a default changed radically over the course of the week, as it increased from 61 to 7,021 points
Oil Minister Eulogio Del Pino, who presented the debt swap plan, assured investors that they will keep earning “excellent profits” and that they will have high guarantees of payment.
Over the last two years, PDVSA has managed to pay its debt and keep from reaching default status, but it appears that political uncertainty is taking its toll on the government and the country’s largest and most important company.