Caracas lobbies Beijing for debt bailout

Venezuela is lobbying China to set up a new binational investment fund that would purchase Venezuelan sovereign and state-owned PdV bonds maturing in 2017-18 at discounted prices.

The effort underway for at least two weeks a took on new significance today after the US government announced sweeping sanctions on sovereign and PdV debt transactions.

A Venezuelan delegation headed by Simon Zerpa, PdV´s chief financial officer and president of state-owned national development fund Fonden, has been in Beijing since last week heading a delegation in talks with three unnamed Chinese banks, a Fonden official told Argus .

The government and PdV have almost $4bn in combined bond principal and interest due in the last four months of 2017, including $3.5bn in October and November.

PdV does not appear to have enough cash reserves to cover the debt obligations. PdV was able to make bond payments in November 2016 and April 2017 thanks to a combined $2.5bn in cash advances it received from Russian state-controlled Rosneft as pre-payment for future oil deliveries. The collateral for the Russian credit was a 49pc stake in PdV´s US downstream subsidiary Citgo.

Venezuela's central bank hard currency reserves of $9.85bn, including less than $600mn in cash, are at their lowest level since 1995 and will likely continue shrinking into 2018 as PdV's oil production and exports continue to fall.

PdV's 2017 year-to-date export price is stuck at about $43.77/bl, and its crude output declined by 221,000 b/d over the first seven months of 2017 to 1.932mn b/d at end-July, according to secondary-source data published by Opec.

Former PdV upstream executive Diego Gonzalez forecasts that Venezuelan production will fall by 100,000 b/d to under 1.8mn b/d by end-2017, or around half of the 1990s level.

The proposed binational investment fund with China would initially buy at discounted prices PdV and sovereign bonds owing principal and interest during the remainder of 2017 and all of 2018.

Over $11bn of combined sovereign and PdV bond debt matures during the rest of 2017 and 2018, according to the central bank and the finance ministry.

But the Fonden official said Venezuela's delegation in Beijing is discussing a more modest offer with the three Chinese banks. The proposed fund would buy over $2.4bn of sovereign and PdV bonds due in 2017-18 for about $1.7bn, an effective discount of almost 30pc from their par value at maturity. The repurchased bonds then would be swapped for new bonds maturing in 2037 and 2038.

It is unclear how Caracas would honor the rest of the looming debt.

Zerpa is also offering Chinese banks and companies stakes in Venezuela's state-owned iron, steel and aluminum industries and rights to other mineral resources including coltan and gold, the Fonden official said.

The government's effort to raise new funds through Beijing is the latest maneuver to avoid a default on its debt, a scenario that has dogged Caracas for several years as its cash position has deteriorated.

A 2014-16 agreement with Rosneft looks unlikely to be replicated. The Russian company recently said it currently has no plans to sign new prepaid oil supply contracts with PdV.

Rosneft since 2014 has made cash advances totaling over $6.5bn to PdV, structured as prepayments for oil supply contracts that the Venezuelan company is now delivering at volumes of over 200,000 b/d.

Russia and China have loaned Venezuela's government and PdV around a combined $78bn since 2007, including over $60bn in mainly oil-backed loans from China Development Bank.

But the Russian avenue to Venezuelan solvency now looks to be taking a different turn. PdV and Rosneft are currently in talks on a new financial deal which, in exchange for over $5bn in new loans, could give the Russian company significant stakes in three oil fields in Zulia state, three Orinoco crude upgraders, an offshore crude venture, and a controlling stake in the second stage of PdV's Mariscal Sucre offshore gas project.

The government of president Nicolas Maduro has assured Russian and Chinese officials that the government-controlled constituent assembly (ANC), elected in a controversial 30 July poll widely deemed as fraudulent, will approve all future financial and joint venture agreements.

Even before today's expansion of US sanctions on Venezuelan financial transactions, Chinese banks doing business with Venezuela's government through Zerpe risked running afoul of Washington if they do any business with US firms. Zerpa is one of 12 Venezuelan government officials targeted by US sanctions last month.

Former central bank economists Orlando Ochoa and Jose Guerra warned earlier this month that Venezuela's economy may contract by over 10pc in 2017, with annual inflation ballooning to over 1,200pc by early 2018.

Related News