The gigantic state oil corporation announced last June 28th that its subsidiary, Pdvsa Finance Ltd, had launched a bid for the repurchase in cash notes of its foreign debt (expiring between 2006 and 2028) for a total amount of over 2.6 billion dollars in circulation.

“Along with the repurchase, Pdvsa Finance is requesting the consent of some bondholders to make modifications on some of the terms under which these bonds were issued, as well as an exemption from some conditions provided in other documents that regulate the bond emissions.", informed the company in an official release.

The company also reported that in order to approve the exemptions and modifications, it was necessary to obtain an affirmative vote from the majority of the representation of the total capital in bonds.

Pdvsa asserted that the repurchase and the request of consent for modifications are intended to “reduce total debt” and provide the firm with greater financial flexibility.

The total debt in Pdvsa , one of the world’s greatest oil corporations, is over six billion $, with expected interests of 760 million $ this year. And as Alí Rodriguez, president of the corporation, said recently, for a company that is valued at 100 billion $, “six billion is a very small debt.”

“Normally, when a company has enough solvency and wishes to reduce its costs(...), it carries out this type of operations”, said Rodríguez the day the operation was announced and gave no further details. “ This year we have covered the financial requirements of the company more than sufficiently”, he added.

Venezuela, fifth world oil exporter, with the U.S. market as its principal client, is trying to improve the conditions of its foreign public debt at a moment in which the country is benefiting from the high oil prices.

Pdvsa Finance specified that the offer, which expires on July 26th at 12:00 PM, New York time, includes the repurchase of eight different types of notes in dollars, expiring between 2006 and 2028, of which 2.5 billion dollars are on circulation.

The bid, headed by Deutsche Bank Securities Inc, and J.P. Morgan Securities Inc., also includes the repurchase of a note in euros, expiring in 2006, of which 88.4million are on circulation.

Suspected insider information

Some of the debt operators and brokers presumed that the information about the repurchase had reached some ears before it was made official. They said that in the first weeks of June, the Pdvsa papers, generally non-liquid, varied in an unusual way, and that their price rose in an unexpected way.

They said, for instance, that the notes expiring in 2028 had risen from 78%, in mid June to a little over 82% by June 18th, and then to 85% the Friday before the announcement of the operation. Until that moment, news about this operation had only leaked to a London journal, which suggested that there would be a repurchase for 1 billion $.

Bonds expiring within shorter terms rose less sharply

Ex-Pdvsa managers were surprised at the operation. Some argued that this type of repurchase is usually made when there’s a very high cash flow, in whose estimation there are no provisions for this repurchase.

They estimated that if Pdvsa receives incomes around 33 billion dollars -supposing an average exportation price of 30$ per barrel, and a daily volume of 2.7 million barrels in sales abroad- , 20 billion of them are to be destined for fiscal contribution.

The remaining 13 billion will be allocated for operational costs and investments. With these figures, the company would not have funds for the repurchase, said the former managers of the company. The director of Finance of the state oil corporation said some time ago that, until November 2003, Pdvsa had paid 2 billion dollars in debt, and that the 250 million balance would be paid in December.

Repurchase amid fears

Other ex-managers said that with the repurchase transaction and the requested modifications, in case that they are approved, Pdvsa seeks to avoid presenting its financial statement for 2003 before the U.S. Security Exchange Commission. Alí Rodríguez estimated that this request for an extension would not affect the conduction of the company and explained that it is common to request these extensions.

The news about the repurchase also aroused fears among investors and rating agencies.

Standard & Poor’s said that that it could lower its "B+" qualification for the Pdvsa Finance notes on circulation because after the repurchase "the credit quality of any note on circulation could drop". We must wait and see what happens.

It explained in a report that it had placed the notes on credit "under observation with negative implications", which would imply a revision up to a level that that would depend on the volume remaining on circulation and on the amortization profile.

Additionally, the emerging markets analyst Jan Dehn, of Credit Suisse First Boston, said to Reuters news agency that the repurchase should result in another debt operation by the firm. Such operation could be carried out by means of either new bond emissions or new loans, so that Pdvsa’s flow of income and expenses is not affected.

But Rodríguez assured recently that "Pdvsa’s relationship between its debts and its patrimony is very comfortable".

According to overall estimates by some officials, the total sales of oil and its products will contribute with half of the income for the state, that expects to receive between 5 and 7 billion dollars of extra income this year, as a result of the high oil prices.

Alí Rodríguez:

400 in savings

With the repurchase of 2.6 billion dollars in bonds, Petróleos de Venezuela will save 400 million dollars, said Alí Rodríguez Araque, president of the state oil corporation. He also assured that there is the determination to value oil as a resource “because as we do it, we achieve greater fiscal contributions for the non-oil sector. With this purpose, we have set forth several actions such as the improvement of the available reserves of non-associated gas, the certification of our tankers and ports, and the repurchase of papers.”

“The weight of these debts on the average costs for the corporation is important. Last year we announced that the balance had surpassed 8 billion $, and that 2.2 billion had been paid, which left the debt slightly over six billion , and interests at 700 million $. This means that with the transaction in debt bonds, it will be reduced to 3.4 billion dollars.”, he explained.

Rodríguez also explained that one of the conditions accepted with these loans was to give 27 million barrels a month in guarantee, which is fourfold the interest of the debt, besides the aggregated costs, that are also considerable, “we carried out this operation, taking advantage of the excellent current financial surplus. We won’t need financing this year”

Rodríguez reassured that there are high levels of speculation in the futures markets. The normal difference between the price in the physical market and the paper price is six dollars per barrel. As for the oil prices, he said that it was very likely for the average Venezuelan price of the whole of its oil products to close at over 30 $ per barrel in 2004, since in the second semester the demand, as well as the prices, dropped due to seasonal conditions. “This didn’t happen this year due to several factors such as the drop in the reserves of light crude oil, the situation in Iraq and the low levels of refining” he said.


The repurchase, it couldn’t have been worse

Pdvsa Finance, started the repurchase of corporate bonds at 2.2 billion $ and 88 million euros falling due between 2006 and 2028. VenEconomía tried in vain to find anything beneficial about this negotiation.

If Pdvsa has admitted that it has a lagging investment program, then there’s no explanation for the fact that this money is being used to buy a debt; one with a good profile and that is easily payable according to the cash flow of the company. It would be more logical to use this money in the investment plans to sustain and improve its production capacity.

Pdvsa could claim that these debts are backed by the bills due and that it is in such a favorable financial status that it doesn’t need to acquire a debt with such guarantees. Nonetheless, if we were talking about a new emission, the cost of the money would be a lot greater.

And that is the worst part. It is worrying that they think that with the repurchase of enough debt -guaranteed with invoices from AAA clients, at the demand of bond purchasers- they can now change it for more debt, backed with invoices from other less qualified clients, like Cuba, for instance.

Finally, there have been comments regarding a leak of information that favored certain groups of investors. Between June 14th and 25th , the purchase of bonds soared due to a sudden rise in the demand, to the point that the negotiated volume broke the record of 300 million $ on Wednesday June 16th. The wave of purchases raised the price of the bonds in offer from 78% to 85%. And now; Pdvsa has offered 91% to repurchase them.

This means that whoever bought a million $ worth of these papers, made a profit of 130,000$ in less than two months.

It would be pertinent -and reasonable- to ask who were those that were privileged with the use of information from Pdvsa that enabled them to get rich in just a few days in an operation that is in every way negative for the corporation and for Venezuela.

A good debt is being bought to be changed for one that is worse, using the money that should be invested in the development of Pdvsa. It couldn’t be worse.