PDVSA planea emitir deuda por 4.700 millones de dólares para pagar facturas vencidas

pdvsa-flag“Es un desastre. Ellos necesitaban hacer esto bien, y han fracasado miserablemente”, dijo  al Nuevo Herald, Russ Dallen, socio gerente de Caracas Capital.

“La oferta que han hecho no es para nada atractiva. Van a tener que mejorarla mucho más para que pueda funcionar. Le están diciendo a los tenedores de deuda que en vez de pagarles el próximo año le van a pagar el mismo monto por tramos durante cuatro años”, explicó Dallen.

http://moninvestnews.com/2016/10/06/pdvsa-emitir-deuda-4700-mln-dlr-facturas-vencidas/

 

Se vende país con vista al mar; por Miguel Ángel Santos y Frank Muci

donungaro-3Según las notas a los estados financieros auditados, en octubre de 2015 la compañía debía pagar 1.413 millones de dólares por servicio de deuda de los bonos que están en poder del Fondo de Pensiones de PDVSA. Sin embargo, en lugar de eso, PDVSA pagó 515 millones y firmó una “nota promisoria” por la bicoca de 898 millones de dólares. Pues bien, esto es importante: en la oferta del canje se aclara que esa “nota promisoria” lleva tasa de interés del 10% y está sujeta a renovación automática.

Es decir: PDVSA le canjeó de forma forzada a sus trabajadores jubilados 898 millones de dólares en bonos por una nota promisoria a futuro que se renueva de forma automática y a discreción de la compañía.

***

Citemos un caso concreto: la empresa minera Crystallex está impugnando la emisión de CITGO del año pasado en una corte de Delaware y ya fue favorecida por una sentencia del CIADI que obliga al Estado venezolano a pagarles 1.400 millones de dólares por la expropiación de su operación de oro en Venezuela. De modo que Crystallex está tratando que PDVSA le devuelva a CITGO los 2.800 millones de dólares, porque considera que la emisión de deuda afecta significativamente el colateral que la compañía eventualmente podría embargar si el Estado venezolano no cumple.[1]

[1] Russ Dallen, Top 10 Things to know about the PDVSA Exchange Deal, (17 de septiembre, 2016)

http://prodavinci.com/blogs/se-vende-pais-con-vista-al-mar-por-miguel-angel-santos-y-frank-muci/

http://www.cesarmiguelrondon.com/opinion-2/el-espacio-de-mis-amigos/se-vende-pais-vista-al-mar-miguel-angel-santos/

 

Bloomberg: Sweetened PDVSA Bond Swap Has Traders Ignoring Congress’s Threat

venny-bondsWhile PDVSA is generally exempted from national assembly oversight because of its status as a separate company, the addition of Citgo as collateral creates a legal gray area, said Russ Dallen, a managing partner at Caracas Capital.

Caveat emptor,” he said. “I don’t believe the swap will be successful for this and other reasons. I think the rally in Venezuela and PDVSA debt is more the result of low liquidity and low bond inventory resulting from investment bank traders not wanting to be too long and too wrong in this credit than any market optimism over the deal.”

http://www.bloomberg.com/news/articles/2016-10-04/sweetened-pdvsa-bond-swap-has-traders-ignoring-congress-s-threat

Financial Times: Venezuelan Oil Major’s Debt Swap: the Beginning of the End?

venz-for-reserves“This is a worrying sign, in that no counsel for PDVSA, no counsel for Citgo, no counsel for the bondholders, no counsel for Venezuela and no counsel for any of the collateral, paying, trustees is putting their name on this document,” Russ Dallen of Caracas Capital wrote in a note.

Complicating matters even further, an array of foreign creditors are already in the process of suing Citgo for non-payment on various contracts, after the Venezuelan government sucked the company dry of cash, Mr Dallen notes.
“It is difficult to see many takers of this deal,” he points out. “What this means for PDVSA is that default is ever more likely. They needed to get this right and they didn’t.”

Bloomberg: PDVSA Debt Swap Plan Gets Early Thumbs Down From Investors

pdvsa-fallThe 50.1 percent stake in Citgo means a change of control could be triggered that would make other debt due before the new bond, with equity holders standing at the back of the line to get paid, according to Russ Dallen, a managing partner at Caracas Capital.

“PDVSA needed to get this right, and they didn’t,” Dallen said in a note to investors. “What this means for PDVSA is that default is ever more likely.”

http://www.bloomberg.com/news/articles/2016-09-19/pdvsa-debt-swap-proposal-gets-early-thumbs-down-from-investors

La Patilla: Es difícil que alguien acepte este canje ofrecido por PDVSA (análisis de Russ Dallen)

venezuela-todayEl prestigioso analista y asesor financiero Russ Dallen acaba de publicar un detallado análisis de la oferta de cambio de bonos hecha hace algunos días por PDVSA, en su intento de evitar pagos a corto plazo, para los cuales obviamente no tiene dinero.

Por Gustavo Coronel en Las Armas de Coronel

Dallen ha hecho algo que nosotros no podríamos hacer: leerse el documento de oferta que hace PDVSA, de 442 páginas, entenderlo y hacernos una lista de los diez puntos más importantes sobre esta oferta. Para quienes puedan y quieran leerse el documento, este es el link

Dallen nos dice lo siguiente :

1- El intercambio es solo por bonos selectos, no todos, por un monto de $7100 millones correspondientes a bonos que expiran en 2017. PDVSA admite en el documento haber saqueado el Fondo de Pensiones, sacando el dinero allí depositado para cambiarlo por notas promisorias, es decir, saca dinero y mete papel (página 71 del prospecto);

2- PDVSA pone como garantía de los bonos que ofrece al 50% del capital de CITGO, empresa que ya tiene demandas de acreedores de PDVSA;

3- No hay asesores legales para PDVSA o para CITGO en esta operación. Tampoco se menciona banco de inversión alguno, lo cual – según Dallen – es poco usual y debilita la oferta;

4- La oferta es uno por uno, es decir, cambia bono de 2017 por bono de 2020, sin ofrecer mayor pago o beneficio especial. Dallen duda del atractivo que esta oferta pueda tener. En efecto, todo lo que le dice al inversionista – añado yo –  es que se espere tres años más para redimir su bono en una empresa que se está cayendo a pedazos.

5- La garantía del capital de CITGO es criminal, dado que CITGO ha sido ya severamente exprimida por PDVSA. Le sacó $2800 millones en Enero 2015 y tiene actualmente una demanda de CRISTALLEX, la empresa minera, la cual trata de recuperar su dinero, obligando a PDVSA que le devuelva el dinero a CITGO, para poder cobrar ellos. Añade Dallen que, de no pagar PDVSA por los nuevos bonos, los acreedores tomarían para sí el 50.1% del capital de CITGO. Ello significaría un cambio de control de la empresa, lo cual de inmediato haría exigible el pago de todas las deudas y bonos antes de que los tenedores de estos nuevos bonos puedan recuperar su dinero. Es decir, ellos tendrían que ponerse de últimos en la cola. Dallen agrega que esta cola está nutrida: CRISTALLEX, $1600 millones; EXXONMOBIL, $1600 millones; RUSORO, $1200 millones; GOLD RESERVE, $769 millones; OWEN ILLINOIS, $485 millones más los que ya vienen en marcha: CONOCO, unos $5000 millones, KOCH y, agrego yo, casi una docena de otros demandantes contra PDVSA;

6- La evaluación que PDVSA hace de CITGO en el prospecto es poco profesional, Dallen la define como “: back of the envelope”. Es decir, lo que podríamos llamar en idioma llano, bien pirata. Es hecha por ellos mismos y habla de, aproximadamente, $9100 millones, aunque admite que no hay garantía de que ese valor se pueda obtener en el mercado.  Una evaluación independiente de CITGO, hecha a petición de esa empresa puede verse en:  https://www.scribd.com/doc/235590994/Citgo-6-25-of-2022-Offering-Memorandumy arroja la cifra de $7000 millones para las refinerías. Después de esa evaluación CITGO vendió su participación en la refinería de Chalmette y algunos oleoductos, por lo cuál su valor ha bajado.

El prospecto, nos dice Dallen, es una mina de información sobre las deudas y problemas de PDVSA y CITGO. Entre lo que ha encontrado, Dallen menciona como especialmente revelador los arreglos de emergencia para convertir deuda comercial en deuda financiera que PDVSA ha tenido que hacer con sus acreedores en el sector de los servicios petroleros, entre los cuales se encuentran  GE Capital Financing, Inc., Cementaciones Petroleras Venezolanas, S.A., Petroalianza, C.A., Maritime Contractors de Venezuela, S.A., Weatherford Latin America, S.C.A., Servicios Halliburton de Venezuela, S.A., Environmental Solutions de Venezuela, C.A., Proambiente, S.A., Elecnor, S.A. and Servicios Picardi, C.A., los cuales suman más de mil millones de dólares adicionales.

La conclusión de Dallen es categórica: Dado el tipo de conversión que se ofrece, uno a uno, y la debilidad de la garantía de CITGO, empresa financieramente debilitada, es difícil que alguien acepte este canje ofrecido por PDVSA. Lo que esto significa, en opinión de dallen, es que la cesación de pagos por parte de PDVSA se hace cada vez más probable. Las reservas internacionales de Venezuela están por debajo de los doce mil millones de dólares y poca de esa suma es líquida. Los pagos que deben hacerse este año y en 2017 suman $15000 millones. Inclusive los pagos de octubre 2016, de $4100 millones, se ven difíciles. Podrían vender el oro remanente pero, que pasaría en 2017? La lista de compromisos para 2017 es aterradora.

Por eso, Dallen termina su análisis con una cita del Infierno de Dante: “Quienes entren aquí, abandonen toda esperanza”.

Este análisis de Russ Dallen puede combinarse con:

-la situación operacional de PDVSA, según la cual existe un colapso de la producción,

-el desplome de las exportaciones a su único cliente que paga en efectivo, los Estados Unidos,

-la estampida de contratistas petroleros de prestigio,

-la entrada al sector petrolero de empresas de maletín como la de los militares,

-la corrupción galopante que los lleva a contratar con empresas e individuos de baja calaña, algunos ya presos y otros bajo investigación,

-la ineptitud y total sumisión política de sus directores, comenzando por Eulogio Del Pino

para pronosticar un total colapso de PDVSA a corto plazo. La cárcel aguarda a quienes han causado este desastre

http://www.lapatilla.com/site/2016/09/18/es-dificil-que-alguien-acepte-este-canje-ofrecido-por-pdvsa-analisis-de-russ-dallen/

 

 

Top Ten Things to Know about Venezuela’s $7 Billion PDVSA Exchange Deal

pdvsa-offering-circular-portada-webWe have gone through the 442 page PDVSA exchange document and, if you do not have a copy, you can access it in LAHT’s online library here:

 

1. The Exchange is only for the $3 billion of PDVSA 5.25% of 2017 and the remaining $4.1 billion of the $6.2 billion PDVSA 8.5% of 2017.  Although PDVSA’s head has said conflicting things over the past month, the $1 billion PDVSA 16 maturing next month is not included.

 

The PDVSA 16 is said to have a large government ownership already, so at different times they have said that they were not worried about it.  Those who follow our Reports may remember in June that one of the gems that we discovered in the 2015 debt financials is that PDVSA wrote an IOU to its Pension Fund for $900 million of the $1.4 billion PDVSA 2015 bond maturity, meaning they only paid $500 million to other holders.

 

We had this from the footnotes in one of our June reports:

 

“In October 2015, for the maturity of the Petrobonos 2015 with a par value of $1,413,000,000 PDVSA paid $515 million in cash and the remainder of these instruments held by PDVSA-related entities were exchanged for promissory notes in the amount of $898 million.”

 

Well, we find out a little more in this latest sacking of the Pension Fund (including more worryingly that it hasn’t been paid) in the latest Prospectus:

 

“In October 2015, following the maturity of the Petrobonos due 2015, PDVSA paid U.S.$515 million in cash and exchanged the remaining bonds held by PDVSA’s related entities were for one-year promissory notes for an aggregate amount of U.S.$898 million with a 10% rate per annum payable semiannually, subject to automatic renewal.” (page 71).

 

2.  The Exchange Bond being offered is a 4 year amortizer, paying 25% of principal each year beginning next year, and maturing in 2020, with an 8.5% coupon and being collateralized “by a first-priority lien on 50.1% of the capital stock of CITGO Holding, Inc. ”   That language is peculiar and legally specific and I will explain why in a later point.

 

3. Paying Agent. After all the sturm and drang with Citibank quitting as paying agent and the resulting mystery, the paying agent here is Law Debenture Trust Company of New York.  They are also the Transfer Agent and Registrar.  The notes will be listed on the Luxembourg Exchange and Banque Internationale À Luxembourg, Société Anonyme is also listed as the Luxembourg listing Paying Agent.

 

4. The Trustee is MUFG Union Bank, N.A.

 

5. The Collateral Agent is GLAS Americas LLC

 

6. No Attorney, Law Firm or Counsel listed.  Although the 442 pages of the document were clearly drafted by lawyers, on the back page of this document where they normally list them, there are no attorneys or investment banks listed.  This is a worrying sign, in that no counsel for PDVSA, no counsel for Citgo, no counsel for the bondholders, no counsel for Venezuela and no counsel for the any of the Collateral Agents, Paying Agents, or Trustees is putting their name on this document, except these 2 sentences on page 176:

 

“Certain legal aspects of U.S. law and New York law and the issuance of the New Notes offered hereby will be passed upon for us by Hogan Lovells US LLP as our U.S. legal counsel. Certain legal matters with respect to Venezuelan law will be passed upon for us by Despacho de Abogados Hogan Lovells, S.C. as our Venezuelan legal counsel.”

 

7. No Investment Bank Listed. Likewise, there is no mention of the investment bank on the front or back pages of this deal.   However, on page 43, Credit Suisse Securities (USA) LLC is named as the “financial advisor for the Exchange Offers.”  (No counsel for them is listed there either, by the way).  Among other caveats, the Credit Suisse portion also warns that

 

“The financial advisor is not being engaged to and will not solicit any holders of Existing Notes in connection with the Exchange Offers. The financial advisor does not make any recommendation to holders of Existing Notes as to whether to exchange or refrain from exchanging their Existing Notes.”

 

The first “tell” in the above is that the cast of agency players in numbers 3-5 are not your normal A-list for a company of PDVSA’s size.  For example, Glas – Global Loan Agency Services – is a relatively new entrant, having just been founded 5 years ago.  On the other hand, Law Debenture, though it has been around since 1889, has lately been largely involved in large bankruptcy situations, including GM (Chapter 11), Lyondell (Millenium America) (Chapter 11), American Home Mortgage (Chapter 11) and General Growth Products (Reorganization), which is not a good sign.  Further, just last month Law Debenture announced it was selling “substantially all of its corporate trust business to Delaware Trust Company” — so Law Debenture may not even be the Paying Agent in the end.

 

 The second “tell” comes in numbers 6-7.  When the lawyers and investment banks on your payroll wont put their name on the legal document, that is a huge flag.  When not even the investment bank you are paying will recommend or sell the resulting financial product they created, well, either the standards on Wall Street are improving or the deal smells so bad even they can’t stand it.

 

8.  The Exchange Valuation.  Although most of us eggheads on the street were analyzing net-present values (NPVs) of the bonds and future exchange 2020 bonds and trying to configure somewhat complicated models based on what each Exchange Ratio and coupon could be and what it would mean for ultimate yields, we gave PDVSA too much credit.  THE OFFER? 1 to 1.  Yep, you can exchange your $1000 of PDVSA 5.125% April 2017 bond in which you will get all your money back in just 7 more months for the exact same amount of a bond ($1000) in which they will pay your money back in 2020 instead.  Oh, and if you don’t jump at this offer by September 29, PDVSA is willing to let you in before October 14, but you will only get $950 of that new bond (ie not even the full amount of $1000 you previously had).

 

9. The Citgo Collateral.  If you thought the 1-for-1 exchange was a pathetic offer, the execution of what could have been some interesting financial engineering has turned it into a weapon of financial mass destruction.  First of all, let me say that I began warning about Citgo when Venezuela was sucking $2.8 billion out of the company in January of last year (“Citgo and the Revolution’s Praying Mantis School of Business” in the Financial Times here: http://on.ft.com/1JOPbEX).   Crystallex, which is owed $1.4 billion for the expropriation of its gold mining operation and has an award for that amount from the World Bank’s International Center for the Settlement of Investment Disputes (ICSID), is currently suing Citgo and PDVSA in Delaware federal court in an innovative suit using the Delaware Uniform Fraudulent Transfer Act to try and force PDVSA to return the $2.8 billion Venezuela sucked out of Citgo (We are quoted in the suit and follow it carefully.  It is mentioned on pages 120-121 of this Offering Circular).

 

Second, as noted above, the use of the terms “collateralized by a first-priority lien on 50.1% of the capital stock of CITGO Holding, Inc” is not an accident.  Should PDVSA default on this bond, PDVSA 8.5% of 2020 bondholders get to take the 50.1% of the shares of Citgo Holding (the other 49% are collateralizing the Citgo Holdings 10.75% 2/15/20.  Bloomberg does not have that Citgo Holdings Prospectus, but you can find it in our library here: https://www.scribd.com/doc/254819229/CITGO-Holding-2020-Offering-Memorandum).

 

But, and here is where the weaponization takes place, 50.1% of the shares means a change of control (CoC), which triggers bond and debt covenants on much of the $5 billion in Citgo debt, making all $5 billion immediately due and fully payable BEFORE PDVSA 2020 bondholders, who are now shareholders in Citgo.  As a Citgo shareholder, PDVSA 2020 bondholders would stand at the back of that line behind the Citgo debt holders.

 

And, as mentioned above, it is a line which could also include Crystallex ($1.4 billion),  ExxonMobil ($1.6 billion), Rusoro ($1.2 billion), Gold Reserve ($769 million), Owens Illinois ($485 million) not to mention those coming down the pike, including ConocoPhillips (potentially around $5 billion), Koch, etc, if they are able to pierce the corporate veil and get judgments against Citgo — which is why Venezuela was trying to sell Citgo in the first place but had to settle for mortgaging it up to the hilt.

 

Which is a another wrinkle — valuation.  In this document, PDVSA gives this generous back-of-the-envelope calculation for their valuation of Citgo.

 

Recently, PDVSA conducted a valuation of the market value of the equity of CITGO and CITGO Holding. CITGO is the owner and operator of important midstream assets, refineries, inventories and receivables, among others, all of which were taken into consideration during such valuation. This valuation exercise was conducted on the basis of an analysis of CITGO and CITGO Holding’s projected future free cash flows, based on certain assumptions regarding growth and taxes. Such valuation also took into consideration the amount of debt at the CITGO level (approximately U.S.$2.0 billion as of December 31, 2015) and CITGO Holding consolidated level (approximately U.S.$4.2 billion as December 31, 2015), among other factors. Such valuation concluded that the market value of the equity (before taxes) as of December 31, 2015 of CITGO was approximately U.S.$9.3 billion and of CITGO Holding was approximately U.S.$8.3 billion, in each case net of debt. In addition, the enterprise valuation of CITGO was U.S.$11.3 billion with an implied EBITDA multiple of 4.7x (based on an EBITDA of U.S.$2.4 billion for the year ended December 31, 2015 (see “Selected Consolidated Financial and Operating Data” for a reconciliation of net income to EBITDA)), and of CITGO Holding was U.S.$12.5 billion with an implied EBITDA multiple of 5.1x (based on an EBITDA of U.S.$2.4 billion for the year ended December 31, 2015 (see “Selected Consolidated Financial and Operating Data” for a reconciliation of net income to EBITDA)). There can be no assurance that such values with respect to a sale of shares of CITGO Holding or CITGO would be achieved.

 

In the whole Offering Circular, there is no Professional Appraisal made by a Professional Appraiser – just the above “here is what we think Citgo is worth.”

 

While we don’t have an independent appraisal of Citgo, we do have an appraisal on Citgo done at their request from an earlier Citgo offering, the Citgo 6.25% of 2/15/22 (you can find the Prospectus in our library here: https://www.scribd.com/doc/235590994/Citgo-6-25-of-2022-Offering-Memorandum ):

 

Turner, Mason & Company (“Turner Mason”), an independent petroleum consulting firm, was engaged to complete an appraisal estimating the value of our three refineries, which will comprise a substantial portion of the collateral securing the notes. Turner Mason estimated the total asset value of our three refineries to be $7 billion (excluding related working capital assets) as of June 1, 2014, based on typical industry valuation methodologies. Although the appraisal is based upon a number of estimates and assumptions that are considered reasonable by Turner Mason, these estimates and assumptions are subject to significant business and economic uncertainties and contingencies, many of which are beyond our control or the ability of the appraiser to accurately assess and estimate. An appraisal that is subject to different assumptions and limitations or based on different methodologies may result in valuations that are materially different from those contained in Turner Mason’s appraisal.

 

Citgo, of course, chose and paid the firm that did the appraisal, but never provided a copy of the appraisal, just the blurb above.

 

Last year, PDVSA and ExxonMobil sold their jointly-owned Chalmette Refinery in Louisiana with 189,000 bpd capacity and a host of pipeline assets for $322 million.  Citgo can refine 749,000 bpd from its 3 refineries (including one close to the Chalmette refinery in Lake Charles, Louisiana) — in other words, about four times the $322 million Chalmette refinery amount — which might be closer to a more market-realistic valuation than PDVSA’s back-of-the-envelope “enterprise” calculation.

 

10.  PDVSA Debts.  One of the reasons the Offering Circular is so interesting is because it is a goldmine of legally obligated information and revelations from Venezuela, PDVSA and Citgo — entities into which we generally have very little transparency.

 

There are many, but of the top ten answers I first sought from the prospectus, the amount of promissory notes was the last in my top ten list.  I found this gem:

 

PDVSA has implemented different transactions that allow to partially convert the outstanding commercial debt maintained with certain commercial suppliers into financial debt. This conversion is achieved by the execution of several note agreements which provide for (i) the assumption by PDVSA of a portion of its affiliates’ debt (evidenced in outstanding commercial invoices and contracts) with certain strategic suppliers; (ii) the novation of said commercial debt into a financial debt that cancels the former one; and (iii) the issuance of a three-year note (or several notes) regulated by a Note Agreement, with quarterly amortizations and an annual interest rate of 6.5%, to each of the participating strategic suppliers.
 
From May 2016 to the date of this offering circular, the aforementioned transactions have been successfully executed with GE Capital Financing, Inc., Cementaciones Petroleras Venezolanas, S.A., Petroalianza, C.A., Maritime Contractors de Venezuela, S.A., Weatherford Latin America, S.C.A., Servicios Halliburton de Venezuela, S.A., Environmental Solutions de Venezuela, C.A., Proambiente, S.A., Elecnor, S.A. and Servicios Picardi, C.A. for a total amount of U.S.$1,151 million.

 

The promissory note debt was previously pegged at just over $800 million and is now $1.151 billion in just 4 months, so it is growing and we now have a list of some of the unpaid entities that are converting some of their invoices to promissory notes that are being traded on Wall Street.

 


CONCLUSION —
Given the 1-to-1 conversion offer along with the weakness of the underlying Citgo collateral and the resulting destruction of Citgo from its execution, it is difficult to see many takers of this deal.  I should note that the terms require a 50% tender rate, although PDVSA reserved the right to waive that condition (and others).

 

What this means for PDVSA is that default is ever more likely.   PDVSA needed to get this right and they didn’t.  Venezuela has less than $12 billion in its Reserves, and not all of that is really readily convertible to cash.  They owe $5 billion more this year and another $10 billion next year.

 

The real worry now is, given the lack of cashflow and shortage of dollars that we have pointed out previously, how will Venezuela and PDVSA be able to pay the October and November payments of $4.8 billion if they are not able to get a significant amount of holders to swap out of the shorter date into longer maturities?  To be able to pay, they could sell from their remaining claimed gold holdings of $7.4 billion, leaving them with $2.5 billion, but then in April they will also owe $3.8 billion, which includes the maturity of the $3 billion PDVSA 5.25% of 4/12/17, and then another
$2.8 billion in November.  In between those payments, they will also have the other regular debt service payments, including of the larger ones, $725 million in February, $310 million in March, inferno$800 million in May, $725 million in August, and $750 million in October.  And speaking of writing checks that you can’t cash, after repeatedly losing in court, last month PDVSA even agreed to pay Gold Reserve $600 million by October 31 and the remaining $169 billion on Gold Reserve’s court award by December 31.

 

In our last Report, we alluded to Dante.  We close where Dante began: “Abandon all hope, ye who enter here.

Rig Count Reveals Venezuela Oil Production to Fall Further

As the world watches the situation in Venezuela continue to ever more rapidly descend from one level of hell to the next – like some coked-up modern version of Dante’s Inferno – my role has almost become a Virgilian explanation to investors, officials and onlookers of what happens in the next lower, depressing ring.

 

There is no easy way to say it: The only thing Venezuela has keeping the lights on – aside from the obvious, seemingly indomitable spirit of its people — is its oil production and that oil production is falling rapidly.  Worse, according to our rig count, investigation and research, that oil production will continue to fall in the year ahead.

 

opec-oil-production-submitted-july-2016

 

As the table above shows, Venezuela did not report its July production figures to OPEC — despite PDVSA President Eulogio del Pino’s mid-month promises that it was going to be up (or perhaps, because of those promises).

 

Instead, what the figures show is that by Venezuela’s own submitted count, its oil production has fallen from 2.587 million barrels per day (bpd) at the start of the year to 2.364 million bpd by the end of June (which it did submit) – an admitted decline of 223,000 bpd in 6 months.

 

But OPEC also keeps a separate count of oil production, and their figures reveal 2 amazing things about Venezuela’s July production:

 

opec-calculated-oil-production-july-2016-crop

 

First is that OPEC calculates Venezuela’s fall in production from January to July as 259,000 bpd lost. Second, that OPEC calculates that Venezuela barely produced over 2 million bpd in July.

 

While 2.095 million bpd is nothing to shake a stick at for most countries, that is down from 3.5 million bpd when Venezuela President Hugo Chavez was elected in 1998.  More importantly, as the table above shows, Saudi Arabia, which has lower oil reserves than Venezuela, is producing 10.477 million bpd.

 

But most importantly, that 2.095 million is sadly not what is available for export.  According to PDVSA’s 128 pages of financials for 2015, Venezuela burned 580,000 bpd domestically in 2015, which PDVSA’s audited financials also explain is down from 647,000 bpd in 2014.

 

pdvsa-internal-venz-burn

 

That would leave just 1.5 million bpd available for export.

<br.

But, as PDVSA’s financials also reveal, Venezuela sent an average of 579,000 bpd to China in 2015 to repay the $65 billion that China has loaned Venezuela (As the price of oil has fallen, that 2015 figure is up from 472,000 in 2014 because it takes more bpd to keep paying the debt, the Financial Statements also reveal).  But remember, China has already paid for that oil with $65 billion in loans to Caracas and Venezuela has already spent that money, so mostly no real income to Venezuela from that 579,000 bpd (which also is counted at a discount).

 

pdvsa-financials-china-petrocaribe-2015

 

So, take away another 600,000 from that 1.5 million bpd and suddenly you have just 900,000 bpd to generate hard cash from export — the bulk of which (around 700,000 bpd) goes to the USA and Citgo in particular, making the USA Venezuela’s biggest customer).  According to the Energy Information Agency, Venezuela’s exports to the USA netted Caracas just $4.3 billion for the first 6 months of the year (700k bpd multiplied by Venezuela basket average for first 6 months of $31.50 comes to around $4 billion).  And that is before the actual lift costs to Venezuela, which are between $10 to $23 a barrel, which is why there is not enough money to pay for food or medicine or bond payments – much less your suppliers and service providers, which bring us to the next leg down.

 

(By the way, you can find PDVSA’s Financial Statements in our database here:https://www.scribd.com/document/319988349/PDVSA-Financials-Consolidated-31-December-2015 ).

 

Because PDVSA doesn’t have the cash, it has not been paying the companies pumping the oil, whether they be majors (Shell says they are owed over $500 million, for example), countries (India says their oil companies are owed $600 million) or oil service providers (Schlumberger and Halliburton together were owed $2.1 billion as of April).

 

As a result, Schlumberger and Halliburton announced 4 months ago that they were drawing down their resources and personnel in Venezuela.  Our investigations confirm that is indeed happening.  In July Lagunillas union officials revealed to Platts that 4 of the 6 platforms that Schlumberger operated on Lake Maracaibo were no longer operating.

 

To confirm the depth of the withdrawal, we started calling extended stay hotels in oil regions across the country where these companies house employees in the field.  At a hotel in Maturin in the state of Monagas, for example, the San Miguel near PDVSA’s PetroOriente headquarters there, Schlumberger had vacated over 80 rooms (over half of the hotel).

 

venz-rig-count-1-year

 

As a result, according to Baker Hughes (above graph), Venezuela’s rig count has fallen 19 rigs from 68 in May to just 49 active rigs in July.

 

venz-rig-count-10-v-venz-oil-production

 

It is the same for other unpaid oil service providers in Venezuela.  In May, Peru’s Petrex halted drilling at 28 of its projects and Argentina’s San Antonio Internacional suspended drilling at 8 of its 16 rigs in Venezuela.

 

What that means is that Venezuela’s future production will continue to fall – and likely below 2 million barrels per day.  Based on the trend lines above, we would not be surprised to see production fall even further to 1.7 to 1.8 million bpd as PDVSA continues in a vicious circle with the rest of the country into a new lower ring of hell.

 

Venezuela Ships More Gold to Switzerland in June

It’s official: We are geeks.

We realize we must be some of the few nerds in the world to anticipate with strong coffee and glee the 2:00 am New York time (8:00 am Zurich time) release of the monthly import statistics from the Swiss Federal Customs Administration so that we can cross-reference them with Venezuela Central Bank stats.

Venz Gold to Switzerland Sept 2015 to June 2016

This morning’s Swiss results show that Venezuela shipped $200 million dollars in gold to Switzerland during June.  As we have previously explained, Venezuela and PDVSA have a light interest payment schedule in June and July, with just $80 million due in June and $70 million due in July.

As a result, Central Bank of Venezuela (BCV) head Nelson Merentes made a Gandalfian effort to prevent Venezuela’s International Reserves from passing below $12 billion in June (and the close of the first half of 2016).  As the chart above indicates – the BCV did not sell any gold in May, although Venezuela sold $2.9 billion in the first half of the year and has sold $3.7 billion of their gold reserves since September 2015.

No sooner had the books been closed on the first half of 2016 than Venezuela’s Reserves crashed through that $12 billion line, however.

Venz BCV Reserves 19 July 2016 crop

From the almost $30 billion that the country had when Maduro began running the country in 2013, the country has just $11.826 billion left {To put that in perspective, if Venezuela decided to liquidate and just pay out all the reserves in the BCV equally to its 30 million citizens, each would get less than $400 per person.  In neighboring Colombia – which had to open a humanitarian corridor to feed, clothe and medicate 123,000 Venezuelans this past weekend – Bogota’s $47 billion in reserves would net out at $1,022 per head; Brazil, $1710 per capita; Mexico, $1413 per head.

But Venezuela – with the world’s largest oil reserves — should be more in the proximity of fellow OPEC nations like Algeria ($3,611 per head) or even Saudi Arabia ($18,187.50 per head)}.

At any rate, Venezuela’s reserves will continue down in August as it, PDVSA and Citgo must pay $725 million in interest (You can use our debt calendar here: https://www.scribd.com/doc/286044491/Latinvest-Venezuela-Report-Bond-Debts-20-October-2015 ).

Following that, September requires interest payments of a comparatively modest $310 million, but October comes in at $1.782 billion and November requires $2.946 billion, so more gold sales are coming – if Venezuela and PDVSA are going to pay.

 

Venezuela’s National Assembly Uses the Nuclear Option

Last week, Henry Ramos, the President of Venezuela’s opposition-dominated National Assembly, did something that has gone relatively unnoticed around the world – and it is something important that YOU NEED TO KNOW.
Ramos used the nuclear option – and no, I am not talking about the decision over which of the 3 main constitutional strategies the opposition would pursue to try to legally remove Venezuela President Nicolas Maduro from office.
Faced with a Supreme Court (TSJ) and Executive Branch that are over-ruling every move they make and basically making them irrelevant (including even limiting getting this message out through the government’s media hegemony that dominates TV, radio and newspapers), Ramos had to take to twitter to warn international investors and counterparties that that any international financial agreement that Maduro signed without National Assembly approval would be null and void.
Warning to foreign creditors: contracts in the national interest signed by the Chavista government without approval by the National Assembly will be null and void.”
That tweet was followed by one from National Assembly opposition Deputy Jose Guerra, a Central University of Venezuela Professor who chairs the Assembly’s Finance Committee, seconding the strategy:
“I second what was said by Henry Ramos Allup: credits planned by Merentes [Central Bank President] and Del Pino [PDVSA head and Minister of Oil and Mining] will be null if not approved by the National Assembly.  You are warned.”
Those who follow our Reports will remember that after the opposition won the December 6th parliamentary elections, we correctly advised that Maduro’s government would pursue the three-pronged strategy to neutralize the National Assembly that they have indeed followed.  Here is the relevant part of our report from December 9th:
9 December 2015
 
“It’s the ‘economic war,’ stupid.”  In simple terms, that’s the Bizarro World version of Clinton strategist James Carville’s slogan that sums up Venezuela President Nicolas Maduro’s reasoning for his government’s loss in Venezuela’s December 6th congressional elections. Instead of owning the economic disaster of crashing GDP, massive shortages, unparalleled currency devaluation and hyperinflation caused by 15 years of unrealistic communist policies and promising to right the sinking ship in his Monday madrigal concession speech, Maduro blamed oligarchs and outside forces for the economy’s — and thus his — dismal performance.
 
Worse, in a telling statement, Maduro went on to argue that: “In Venezuela the opposition has not won. For now, a counter-revolution that is at our doorstep has won.” Then he insisted that what the country needed was more radicalization — not less — and promised to deliver it.  “The struggle for the construction of socialism is just beginning,” he declared, and went on to say he would double down on his disastrous economic policy.
 
Sadly, despite the opposition’s overwhelming victory in Sunday’s congressional elections, things will remain bad in Venezuela and will likely worsen as political infighting and retrenchment increase.  Here is why.
 
WHAT COMES NEXT?
 
What will the Venezuela government do now?
 
Maduro has called for a week of discussion in his party.  He has called a special meeting for all the organizations that make up the GPP – the umbrella group of those who support the revolution.  Tuesday night Maduro announced that he was firing his whole cabinet.
 
Next Wednesday, Maduro will gather with all 900 of the government political party PSUV delegates to evaluate the situation, make plans and create proposals.
 
  1. The Communal Powers
 
More importantly, for Saturday, Maduro called a meeting of the presidential councils of popular power.  These “Communes” have been largely ignored by the opposition and the vast majority of the councils are heavily Chavista.  Venezuela passed the Organic Law of the Communes in December 2010, and the Ministry of Communes claims that there are over 40,000 community councils, with over 1000 communes.  Maduro increased the 2015 budget of the Ministry of Communes by 62% in preparation for their increasing importance in his strategy. In the Chavez-Maduro version of the communes, residents unite in a number of community councils with the object of self-governance through a communal parliament – a parallel structure to the existing municipal, state and national structures financed from the executive branch.  This is part of what the government labels its grass-roots “participatory democracy” that Maduro could turn to in order to get around the opposition-dominated National Assembly. 
 
The government has followed the cut, isolate and neuter strategy before.  When Opposition leader Antonio Ledezma defeated the Chavistas for the important and symbolic Caracas mayor position in 2008, the Chavista dominated National Assembly created a new “Capital District,” took away all the mayor’s power, money and responsibilities, and gave it to a new Chavez-appointed Caracas governor.  Ledezma was subsequently arrested on trumped up charges of participating in an “American plot to overthrow the government,” jailed and is currently still under house arrest after undergoing medical treatment.
 
  1. The Supreme Court
 
This is possibly the most important and primary tool in the Chavista arsenal to maintain power and, like the communes, the signs point to the work that the government has been doing to prepare for Maduro’s reliance on the Supreme Justice Tribunal (TSJ).  In October, the government persuaded 13 judges of the TSJ to take early retirement.  Some of the judges were of questionable loyalty and many were set to have their terms expire in 2016, which would have allowed the new opposition-controlled National Assembly to appoint them, so having them resign now allows Maduro to replace them with loyalists.
 
National Assembly President Diosdado Cabello – who participated with Chavez in the coup in 1992 – said Tuesday that the National Assembly would be appointing those 13 new TSJ judges before the end of the year (likely over the Christmas holidays, which is what they also did last year).  The government will, thus, rely on its fully-packed Supreme Court with its powerful 7 member Constitutional chamber to overturn, neutralize or block any movements from the incoming opposition-dominated National Assembly.  Since 2004 (after Chavez packed it with another 12 loyal justices after his original 20 appointed justices dared to rule against him), the Supreme Court has never ruled against the government.  And it only takes 4 justices of the Constitutional chamber to rule an action or law unconstitutional — in other words, 4 Chavista justices can defeat the whole of the elected National Assembly.
 
 
  1.  Rule-by-Decree Authority
 
The outgoing National Assembly will probably also pass a decree giving Maduro the power to make and pass laws without the National Assembly, a Rule-by-Decree authority called Ley Habilitante (Enabling Law).  Not only has Maduro been given this authority for most of his term in office, Chavez even did it in advance of the 2010 National Assembly elections which saw the opposition gain a substantial number of seats, though not a majority.  When, of course, the new opposition-dominated National Assembly tries to revoke this Rule-by-Decree authority with its supermajority, the matter will likely end up in the Supreme Court (see #2).
 
In short, we have a recipe for impasse and any needed economic reforms will likely take a backseat to the power struggles.  It is possible, of course, that some government officials and judges may see the writing on the wall and begin to negotiate about joining with the opposition to save their skins, jobs or just stay out of jail, but cornered rats do not as a general rule behave rationally.”
And sadly, so far this is what has happened and will continue to happen, with the Supreme Court even giving standing to “Commune” heads and even using the Commune law to limit the National Assembly (here, for example: https://www.scribd.com/doc/299469581/Venezuela-TSJ-Enforcing-Economic-Emergency-Decree-11-February-2016  or here, for the latest affront to the separation of powers: https://www.scribd.com/doc/301818932/Venezuela-TSJ-Decision-Limiting-National-Assembly-Powers-2016 )
Going for the nuclear option of disavowing the repayment of any new international investment or bond is the one thing that Ramos and the National Assembly could do to halt Maduro – it cuts off badly needed funds that the government needs to survive.  Indeed, there are several investments and bond issuance deals in the works, including for settling an expropriation debt with Gold Reserve, LLC, and continued financing of the development of that Brisas and Cristinas gold mines, and even a deal in the works to exchange unsecured PDVSA supplier debt for newly issued collateralized PDVSA bonds.
Ecuador’s President Rafael Correa used a similar rationale to disavow $3.2 billion in Ecuador bonds 10 years ago.  Investors would be wise to pay attention.

LAHT: Venezuela Gold Reserves Fall Below $11 Billion

venz-reserves-23-dec-2015As Venezuela increased its Reserves held by the Central Bank by $1.8 billion in what Latinvest’s Russ Dallen called “the annual end of the year window-dressing”, Dallen also pointed out that Venezuela’s gold reserves had actually fallen below $11 billion in November.

More importantly, says Dallen, the Central Bank quietly released the reserve breakdowns from November, which show that Venezuela’s gold holdings actually fell below $11 billion.

“The reserve figures from November show that Venezuela’s gold holdings fell $120 million to $10.976 billion,” Dallen wrote in a report to Latinvest clients. “That means that Venezuela’s gold holdings have now fallen over $3.5 billion in 2015.”

Venezuela’s reserves had fallen to a 12 year low of $14.583 billion on December 11, the lowest they have been since 2003, notes Dallen.

“In 9 months Venezuela’s reserves fell almost $10 billion from their March high of $24.257 billion,” Dallen said. “And with Venezuela’s mix of heavy oil now fetching under $30 a barrel, with almost $11 billion in foreign debt service next year, inflation over 200%, shortages everywhere, and the country’s institutions set for high intensity political combat, the country is on track for both a financial and civic breakdown.”

http://www.laht.com/article.asp?CategoryId=10717&ArticleId=2402656

Venezuela: It’s the Economic War, Stupid!

“It’s the ‘economic war,’ stupid.”  In simple terms, that’s the Bizarro World version of Clinton strategist James Carville’s slogan that sums up Venezuela President Nicolas Maduro’s reasoning for his government’s loss in Venezuela’s December 6th congressional elections. Instead of owning the economic disaster of crashing GDP, massive shortages, unparalleled currency devaluation and hyperinflation caused by 15 years of unrealistic communist policies and promising to right the sinking ship in his Monday madrigal concession speech, Maduro blamed oligarchs and outside forces for the economy’s — and thus his — dismal performance.
Worse, in a telling statement, Maduro went on to argue that: “In Venezuela the opposition has not won. For now, a counter-revolution that is at our doorstep has won.” Then he insisted that what the country needed was more radicalization — not less — and promised to deliver it.  “The struggle for the construction of socialism is just beginning,” he declared, and went on to say he would double down on his disastrous economic policy.
Sadly, despite the opposition’s overwhelming victory in Sunday’s congressional elections, things will remain bad in Venezuela and will likely worsen as political infighting and retrenchment increase.  Here is why.
WHAT COMES NEXT?
What will the Venezuela government do now?
Maduro has called for a week of discussion in his party.  He has called a special meeting for all the organizations that make up the GPP – the umbrella group of those who support the revolution.  Tuesday night Maduro announced that he was firing his whole cabinet.
Next Wednesday, Maduro will gather with all 900 of the government political party PSUV delegates to evaluate the situation, make plans and create proposals.
  1. The Communal Powers
More importantly, for Saturday, Maduro called a meeting of the presidential councils of popular power.  These “Communes” have been largely ignored by the opposition and the vast majority of the councils are heavily Chavista.  Venezuela passed the Organic Law of the Communes in December 2010, and the Ministry of Communes claims that there are over 40,000 community councils, with over 1000 communes.  Maduro increased the 2015 budget of the Ministry of Communes by 62% in preparation for their increasing importance in his strategy. In the Chavez-Maduro version of the communes, residents unite in a number of community councils with the object of self-governance through a communal parliament – a parallel structure to the existing municipal, state and national structures financed from the executive branch.  This is part of what the government labels its grass-roots “participatory democracy” that Maduro could turn to in order to get around the opposition-dominated National Assembly.
The government has followed the cut, isolate and neuter strategy before.  When Opposition leader Antonio Ledezma defeated the Chavistas for the important and symbolic Caracas mayor position  in 2008, the Chavista dominated National Assembly created a new “Capital District,” took away all the mayor’s power, money and responsibilities, and gave it to a new Chavez-appointed Caracas governor.  Ledezma was subsequently arrested on trumped up charges of participating in an “American plot to overthrow the government,” jailed and is currently still under house arrest after undergoing medical treatment.
  1. The Supreme Court
This is possibly the most important and primary tool in the Chavista arsenal to maintain power and, like the communes, the signs point to the work that the government has been doing to prepare for Maduro’s reliance on the Supreme Justice Tribunal (TSJ).  In October, the government persuaded 13 judges of the TSJ to take early retirement.  Some of the judges were of questionable loyalty and many were set to have their terms expire in 2016, which would have allowed the new opposition-controlled National Assembly to appoint them, so having them resign now allows Maduro to replace them with loyalists.
National Assembly President Diosdado Cabello – who participated with Chavez in the coup in 1992 – said Tuesday that the National Assembly would be appointing those 13 new TSJ judges before the end of the year (likely over the Christmas holidays, which is what they also did last year).  The government will, thus, rely on its fully-packed Supreme Court with its powerful 7 member Constitutional chamber to overturn, neutralize or block any movements from the incoming opposition-dominated National Assembly.  Since 2004 (after Chavez packed it with another 12 loyal justices after his original 20 appointed justices dared to rule against him), the Supreme Court has never ruled against the government.  And it only takes 4 justices of the Constitutional chamber to rule an action or law unconstitutional — in other words, 4 Chavista justices can defeat the whole of the elected National Assembly.
  1.  Rule-by-Decree Authority
The outgoing National Assembly will probably also pass a decree giving Maduro the power to make and pass laws without the National Assembly, a Rule-by-Decree authority called Ley Habilitante (Enabling Law).  Not only has Maduro been given this authority for most of his term in office, Chavez even did it in advance of the 2010 National Assembly elections which saw the opposition gain a substantial number of seats, though not a majority.  When, of course, the new opposition-dominated National Assembly tries to revoke this Rule-by-Decree authority with its supermajority, the matter will likely end up in the Supreme Court (see #2).
In short, we have a recipe for impasse and any needed economic reforms will likely take a backseat to the power struggles.  It is possible, of course, that some government officials and judges may see the writing on the wall and begin to negotiate about joining with the opposition to save their skins, jobs or just stay out of jail, but cornered rats do not as a general rule behave rationally.
THE ECONOMY
While most news has been understandably focused on the election and its machinations, back in the economics department, things are bad.
 Oil Hits a New Low
First of all, cash inflows are collapsing as the price of Venezuela’s oil basket fell to $34.05 a barrel last week — its lowest since February of 2009.  Venezuela has been lobbying its OPEC partners for months to lower production quotas, but instead got the opposite result as OPEC decided to increase the quota last Friday.  As a result, Venezuela’s oil basket will fall even closer to $30 this week.
Financial Reserves Fall to a New Low
Venezuela Central Bank (BCV) reserves fell to a new low of $14.592 billion last week, the lowest since 2003.  The BCV has strangely not published any reserves figures this week so far.
Gold Reserves Fall to a New Low
The government quietly released October balances on Friday night under the penumbra of the run-up to the election which show that Venezuela’s gold holdings fell almost half-a-billion to $11 billion during October.  That means that Venezuela’s gold reserves have fallen over $3.5 billion so far this year.
Venz BCV Balance 31 Oct 2015.jpg
Unpaid Ships are Piling Up Offshore
Some 60 ships are waiting offshore waiting to be paid before they unload their cargoes, mostly light oil and oil components to mix with Venezuela’s heavy Orinoco oil, according to Reuters. But some are cargo ships. As of October, Venezuelan state importer monopoly Corpovex had only paid for $6 billion of the $19 billion of goods it ordered this year, according to an internal Corpovex document seen by Reuters.
When the anatomy of the government’s failure in the December election is written, this will be an important footnote:  To try to buy votes and create the last minute illusion of a land of plenty to gullible voters, the government had planned 5,000 megamarkets around the country.  In a testimony to the consistent efficiency of the Bolivarian government, the food never arrived.
 
WHAT IS TO COME POLICYWISE FROM THE U.S.?
There has been enormous interest around the country and world about Venezuela and its elections.  I spent the last several weeks travelling around the country and region and participating in various events speaking about Venezuela and nowhere was there more interest than in Washington, D.C., where the Senate Human Rights Caucus headed by Senator Chris Coons and Senator Mark Kirk convened a group of experts to speak about Venezuela and its elections.
Indeed, the U.S. government was following the Venezuela elections so closely that not only did Hillary Clinton speak about the results before they were released at an event on Sunday night (LAHT exclusive video here: https://www.facebook.com/LatinAmericanHeraldTribune/videos/10205607457413346/?pnref=story ), but the U.S. also had a whole aircraft carrier task force off of Venezuela’s coast monitoring all the signal intelligence and wire traffic (LAHT exclusive here: http://www.laht.com/article.asp?CategoryId=10717&ArticleId=2401334 ).
I also understand from contacts at both the State Department and the Executive Branch that, as part of its strategy to prove that it is getting tough on Venezuela and highlight the country’s corruption, the White House intends to release the names of the 56 Venezuelans who had their U.S. visas revoked this year.
And, finally, also in that focus on Venezuela corruption, it has gone unreported that there are actually 4 sealed indictments in the U.S. arrest of the nephews of Nicolas Maduro and Cilia Flores on narco-trafficking, not just the 2 who have been arrested so far.
So be aware that there are possibly 2 more indictments in that case still to come, should the relevant parties venture outside of the safety of Venezuela.
USA v Campo Flores et al - Docket showing more sealed def - November 2015.jpg
As you can see from the latest docket below, the docket has now been cleaned up to hide the existence of the other 2 sealed indictments in the vault (docket #3 and #4 from above are now missing), so just keep it between us!
USA v Flores Now Missing 2 Sealed Indictments - 4 December 2015.jpg
Thanks again for your continued readership and business.  Please let me know if there is anything else we can assist with.

CNN: Venezuela lacks a lot more than McDonald’s French fries

“The country is imploding,” says Russell Dallen, managing partner of Caracas Capital Markets, a Miami-based firm that specializes in Latin American securities. “Venezuela couldn’t pay its bills at $100 a barrel of oil and it’s darn sure going to have a hard time paying them at $40 a barrel of oil.”

Venezuela does not sell enough of its oil to cover its debt, Dallen says. Although Venezuela produces about 2.3 million barrels of oil a day, Venezuelans consume a third of that and pay almost nothing for it. While the country also sends a lot of oil to China, it’s almost entirely to pay off previous debts, according to Dallen.

The South American nation has $11 billion in debt payments this year. The critical moment will come in October, experts say, when about $5 billion is due. Maduro has not asked the International Monetary Fund or World Bank for financial help.

http://money.cnn.com/2015/01/16/news/economy/venezuela-nears-default/

Financial Times: Argentina’s holdout saga: pacta sunt servanda

The most casual followers of the Argentine debt saga will be familiar with the Latin term pari passu, or “equal footing” – or, in this case, equal payment to all holders of Argentine bonds, whether or not those holders took part in the country’s two restructuring programmes in 2005 and 2010 following its 2001 default.

Now Russ Dallen of Caracas Capital Markets, a veteran commentator on and broker in Latin America’s most exotic bond markets, has introduced another smattering of Latin to the story: pacta sunt servanda, or “contracts are for keeping”.

That’s what Dallen wrote to investors on Thursday as the basket of defaulted Argentina bonds, bought by Dallen for clients last year when they were trading for 30 something cents on the dollar, rose through the mid 80s to reach a bid price of 90 cents on the dollar.

This from his note:

While Argentina rails and nashes their teeth at the injustice of it all, the US courts in the end are simply enforcing contract law; and like it or not, Argentina wrote bad contracts (or good contracts, depending on which side of the litigation fence you are on).

There are about $3bn worth of untendered Argentine debt – bonds that did not take part in the restructuring – including about $1.3bn held by investors who have sued Argentina in the US (because the bonds were written under US law), led by Paul Singer’s NML Capital.

Source: Russ Dallen, Caracas Capital Markets

The defaulted bonds have shot up in value since the US Supreme Court refused on June 16 to overturn previous rulings that ordered Buenos Aires to pay the holdouts according to the contracts on their bonds. They are now, says Dallen, approaching face value.

But what if the contracts really are for keeping?

There are many different instruments in the bundles traded generically as defaulted Argentine debt. In a normal bond market, bonds are traded with interest: a bond that pays interest every six months will rise in price over the course of each six month period in accordance with the amount of due interest accrued. Argentine defaulted bonds are traded without interest, on the assumption that no interest will be paid.

However, if the contracts are enforced as written, that could change dramatically in bond holders’ favour: they would get not only 100 cents on the dollar but also the amount of interest unpaid since the default nearly 13 years ago, which could typically double or triple the bonds’ face value.

Might that happen? It just might. The prospect would certainly tend to push the price of the bonds up rather than down. And it would add to what Dallen says is an extreme mismatch between people now clamouring to buy the bonds and those willing to sell.

“It may well be that Argentina is buying the bonds back,” he says. “It would make sense and it would certainly be the cheapest solution for them, especially if they will have to pay a multiple.”

Argentina’s best course of action now would appear to be to negotiate in good faithwith the holdouts. It may well be able to settle for less than the full amount in the bonds’ contracts. Says Dallen, who got his law degrees from Christchurch College Oxford and Nottingham University in the UK and Columbia Law School in the US: “The first thing they teach you on both sides of the Atlantic is pacta sunt servanda. Then they teach you how to get out of it.”

http://on.ft.com/1jnAP1V