PDVSA - Petroleos de Venezuela

[adventurer]

• This is a speculation in bonds.
   
  Thread order:
  1. General introduction into the speculation
  2. The bond´s profile
  3. Outlook on cash markets (short-term loans) and capital markets (long-term loans)
  4. Impacts of domestic policy
  5. Impacts of external policy
  6. Revenue and expense policy
  7. Peace/War
  8. Revolution/social peace
  9. My speculation construct
   
  1. General introduction into the speculation
  Venezuela is currently suffering from a massive economic and humanitarian crisis as well as a dispute between government and opposition, whereas the opposition is holding the government responsible for the crisis. The government under president Maduro tries to stay in power through disempowerments and intimidation (escape of the attorney general as well as the leader of the opposition). Mediations by the Vatican failed.
  Goldman Sachs bought PDVSA bonds as they "believe in a good future" for this country. Whatever this future is going to look like, the investment did not make any sense to me even before the introduction of debt restructuring plans by Maduro (which caused the bonds to decrease by 30 - 40% in value in just one day). Because if the market would have bet on a change in government, the bond prices would have been far higher with far less volatility. Because whatever happens it will still work out their way. If the current government pays back, I will receive principal payment + interest. If a new government pays back, I will receive principal payment + interest maybe in time or a bit later (which is more probable). The low prices at that time though already (before the restructuring plans) showed a more skeptical attitude towards the situation. And even if there is a change in government, I am convinced stability will decrease at first and with it bond prices. So how are bond prices expected to rise during an economic crisis and high debt? And one must bear in mind: debt probably has to be repaid before new credits are granted.
   
  2. The bond`s profile
   
  Debtor`s solvency
  Moody`s: Caa3 --> speculative, high credit risk
  S&P: CCC --> speculative, low revenues
  Fitch: CC --> high risk, very speculative bond
   
  The bond`s interestrate
  A1GZSW --> 9,000% in USD --> maturity on 17th of November 2021 (PDVSA)
   
  The Greenback`s value and future outlook
  Despite political insecurities (I shall name President Trump as the main factor here), the American economy will remain a guarantor for a stable US-dollar. Though there is an unpredictible government in power right now, I do not believe it is strong enough to compromise the economy on a long-term basis which is why I believe in the Greenback on a long-term basis.
   
  Paying conditions, determined by the issuer and can be read in the bond terms
  Maturity: November 17, 2021
  Interest payments: semi-annualy on the 17th of November and May.
  Bonds can be repaid at every time completely or partly.
   
  Hypothecal securities
  The bonds are not secured and will be treated as "senior debt" (primary debt). Bonds issued later on will not be secured to not disadvantage the older bondholders (that is the only guaranty).
  One may consider that China granted credits and gained oil supplies in return.
  One may also consider that Russia gained influence by granting credits to PDVSA through their state-owned company Rosneft. In 2016 Rosneft bought 49% of Citgo (subsidiary of PDVSA in the US) for 1,5 billion US-dollars.
   
  All possible clauses that have not been named before
  1. The bond can be terminated without naming any reasons against repayment of 100%.
  2. The bond can be terminated without naming any reasons against repayment of 100% including interest.

 

 

3. Outlook on cash markets (short-term loans) and capital markets (long-term loans)

Federal Reserve Systeme:

Federal-Funds-Rate --> 1,00 to 1,25% (since 15th of June 2017)

 

European Centralbank:

Base rate --> 0,00% (since 16th of March 2016)

 

Bonds are denominated in US-dollars. Interest rates in the US seem to keep rising due to ongoing economic growth.

 

4. Impacts of domestic policy

Presidential democracy. Ban on privatising the oil industry (which actually happened by granting rights to Rosneft) and health and welfare system. Free education.

 

Inflation is said to be the highest in the world. The last currency devaluation took place in May 2017. The currency lost 64% towards the dollar. In November a 100.000-Bolivar-note has been introduced. Its value on the black market is far below the official price. Venezuela has outstading bond debt of roughly 60 billion US-dollars, while the whole external debt (loans from Russia/China included) reaches roughly 140 billion US-dollars. Furthermore S&P noted a payment default, after interests in US-dollars were not repaied in time.

 

5. Impacts of external policy

The state-owned company PDVSA owns a subsidiary in the US (Citgo). There were US-sanctions introduced which prohibit the buying of newly issued bonds of the Venezuelan government. This keeps the country away from important capital markets to refinance their debt. The tendency therefore goes further towards Russia/China to refinance. Exports are made up by 95% of oil exports by which the state gains foreign currencies.

 

6. Revenue and expense policy

The socialist structure is dependent on the global oil price. The revenues under former president Chávez were redistributed without any problem due to a high oil price (education, health and welfare system, food-imports). Soon after Maduro took power the oil prices declined heavily and with it Venezuela`s revenues. Debt rose sharply to finance the system. Intereset payments rise and are due as a result of rising debt over the years. The trouble is they can not be financed with the current oil price.

 

7. Peace/War

The country is in a humanitarian crisis due to missing foreign currencies which are needed to finance the system. A military coup failed in 2017. The government suppresses the opposition. In face of demonstrations with rising death rates and the reasons stated above there may not be war but certainly no peace.

 

8. Revolution/social peace

A humanitarian crisis in combination with a high inflation and corruption (maybe due to distress) result in a hotbed at least for a political landslide.

 

9. Speculation construct

I expect the Maduro regime to fail and with it, the bond prices will decrease to near "non-valeur" level. When the new government takes power it will have to repay the old debt before refinancing itself on the international capital markets. Because the biggest creditors are in the US and why should they grant new loans if the new government is not willing to repay debt made by the Maduro regime or in general does not repay old debt?

Political dispute with the opposition, heavy economic crisis combined with an extreme inflation and a humanitarian crisis will cause a collapse if excessive indebtedness keeps rising and international capital markets will not or can not grant new loans.

 

As a result I would buy PDVSA bonds when they are near a "non-valeur" level and speculate on principal payment + interest repaied by the next government. Thoughts?

 

Edit: Bond terms: https://settysoutham.files.wordpress.com/2011/12/pdvsa21prospectus.pdf