Venezuela: PDVSA issuance counteracts dollar shortage


Jason Mitchell
Published on:

Clampdown on black market FX trade; Long-term fears about default

PDVSA, Venezuela’s state-owned oil company, is issuing larger amounts of debt in the international markets so that individuals and corporations in the country have access to US dollars, after the government stopped local brokerages from exchanging dollars on the black market last year.

The company issued a total of $10.8 billion of debt last year maturing in 2014, 2017 and 2022, according to Barclays Capital. It pays the highest yield – more than 16% on the 2017 paper and 17.5% on the 2022 paper – of any sovereign or corporate in the emerging markets.

Last May, Venezuelan police and prosecutors raided 30 of the country’s brokerage houses to stop them from trading on the parallel foreign exchange market. The official exchange rate is 4.2 bolivars to the US dollar but the black market rate can be as high as 8.7 bolivars.

However, the clampdown led to a shortage of dollars and the government has had to find other mechanisms to obtain them, especially for individuals who are friendly towards president Hugo Chávez’s government.

"Venezuela has been using PDVSA as a tool to support the country’s fiscal and monetary policy"

Juan Cruz, Barclays Capital

"Increasingly, Venezuela has been using PDVSA as a tool to support the country’s fiscal and monetary policy," says Juan Cruz, a Venezuela analyst at Barclays Capital.

In 2010, PDVSA’s net profit was $3.1 billion, down 30.5% on 2009’s $4.5 billion. This was prompted by a 35% increase in fiscal contributions to $33.2 billion from $24.6 billion in 2009. The state is taking 80% of the increase in gross profits, according to Barclays Capital.

Experts are concerned that in the long term PDVSA could have problems with servicing the debt it is assuming, essentially on behalf of the state.

"The risk of default by the company can be overstated in the short term," says Cruz. "It should be remembered that sovereign Venezuela and Venezuelan corporations have never defaulted on their debt, unlike in Argentina where bonds trade at considerably lower yields than Venezuela. The problem is that the markets have to factor in how peaceful a transition to a post-Chávez landscape would be. They just do not know that."

He says that in the short term – with high oil prices – PDVSA has substantial cashflow and has no issue with servicing the debt. Furthermore, the government has made servicing one of its highest priorities.

However, Barclays Capital says that a worst-case outcome must be considered in case the transition to a post-Chávez era is not peaceful and, using the corporate restructurings in Argentina as a proxy for default, it estimates average recovery at 66.6% of par claims.