Venezuela's small win won't help it in the long run

Venezuela’s state oil company PDVSA announced on Monday the results of a bond swap, in which creditors holding $2.8 billion of debt agreed to swap their holdings for $3.4 billion of new bonds maturing in 2020.
The deal was below the $5.325 billion the company was aiming for and Bloomberg reports that Venezuela had to “pawn one of its most attractive assets — Citgo Petroleum Corp., the US unit of PDVSA — to persuade investors to accept the deal.”

Still, it does give the company a chance to catch its breath — if only for a second.

“PDVSA: As good as it gets,” wrote a Deutsche Bank team led by Drausio Giacomelli in a note to clients. The bond swap “should help alleviate [the company’s] liquidity pressure over the near term, but it will not resolve its fundamental problems.”

“PDVSA (and Venezuela) would have bought some time — likely between six months to a year — to consolidate its finances, but a year from now it would likely be facing a very similar situation,” they added.

Notably, the cash-strapped Venezuelan oil company warned ahead of the swap deadline that if the operation failed, it would have a hard time paying its debt. Some had interpreted that as an attempt “to scare the market,” but other analysts argue that the possibility of default is not completely gone.

“We had said in our previous note that the swap would not remove default concerns, and we reaffirm this view,” wrote Francisco Velasco and Stuart Culverhouse of Exotix Partners in a note. “Debt default will continue to be a key topic for PDVSA and Venezuela bondholders.”

The duo continued:

“Given the lower than desirable participation in the swap (from the perspective of the government), the government will now also need to think about how it will manage through next year. After principal debt payments of PDVSA 16 and 17n we will be monitoring the balance of international reserves, which are now US$11.8 billion, and the government’s ability to secure alternative financing (likely via other unorthodox financing means).”

While the oil company is struggling, Venezuela as a whole is currently on the precipice of political and economic disaster, plagued by economic mismanagement, a chronic balance of payments problem, food and essential goods shortages, and looting and violence.

Most recently, the country’s election board suspended the recall referendum against President Nicolas Maduro last Thursday. The country is now on edge, with opposition leaders accusing the president of teetering into dictatorship.

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