PDVSA Secured Creditors Are Said to Organize Before Payment

(Bloomberg) -- Creditors holding secured bonds from Venezuela’s struggling state oil company are organizing ahead of an interest payment due Friday, according to people with knowledge of the matter.

The group of investors, which includes Ashmore Group Plc -- the largest reported holder of the $2.5 billion of notes due 2020 from Petroleos de Venezuela SA -- has tapped law firm White & Case LLP to advise them, said the people, who asked not to be identified because the matter is private. It’s unclear how much of the debt the creditor group holds. Representatives for Ashmore and White & Case declined to comment.

The group is preparing for the possibility that PDVSA fails to make its $107 million payment due Friday, which after a grace period expires would entitle them to start the process to enforce their collateral rights. The bonds are backed by a first-priority lien on a 50.1 percent stake in Citgo Holding Inc., PDVSA’s U.S. refining arm. Venezuela and its state-owned companies are behind on about $3.4 billion of obligations amid a severe shortage of hard currency and punishing international sanctions that have limited the country’s ability to find financing.

While PDVSA may take advantage of the 30-day grace period, it’s unlikely the company will ultimately fail to make Friday’s payment, according to Hongtao Jiang, a strategist at Deutsche Bank AG. With creditors organizing and “putting pressure on the issue,” the company won’t want to lose those rights to Citgo, he said. The other 49.9 percent of Citgo has been pledged to Rosneft PJSC as collateral for a $1.5 billion loan.

At 86 cents on the dollar, the 2020 bonds trade about 50 cents above the rest of the company’s bonds, which are unsecured. That’s an attractive price if PDVSA ends up making the bonds’ $840 million amortization payment in October -- but the risk of them failing to do so “is very significant,” said Jiang. Without that October payment, prices signal an $8 billion valuation of Citgo, given how indebted the company is, he said.

“This implied valuation is on the high side, in our view, especially considering potential valuation risk during the foreclosure process due to potential legal issues,” he said by e-mail. Still, his clients appear to be optimistic. “Some of the U.S. high-yield investors we have talked to seem to hold a constructive view on the valuation of CITGO, and optimistic about the interest” in the collateral.

More broadly, Venezuela’s creditors are showing signs of getting restless almost six months after President Nicolas Maduro said the oil-exporting country would seek to restructure approximately $60 billion of debt. As arrears pile up with little indication that a resolution is imminent, a separate group of about 15 fund managers has formalized a committee to consider their next steps, tapping Millstein & Co. as financial adviser.

Presidential elections slated for next month may prove a catalyst for regime change, potentially easing the way for the lifting of U.S. sanctions that prevent the country from issuing new bonds that would generally be part of any restructuring. That’s motivating some creditors to get themselves organized ahead of time. Still, analysts say opposition candidate Henri Falcon has little chance of an electoral victory.

The nation’s oil production has plunged amid a lack of investments and triple-digit inflation -- exacerbating Venezuela’s shortage of dollars and basic goods. The country is mired in its worst-ever recession, creating an economic disaster that’s driven 100,000 people a month to flee the nation.

©2018 Bloomberg L.P.