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Investors blow cold over PDVSA swap

NEW YORK, Sept 16 (IFR) - News of PDVSA's bonds swap left markets in two minds this week as the Venezuelan oil company sought relief from a wall of maturities falling due over the coming months.

After months of speculation, PDVSA's president Eulogio Del Pino finally came clean when he announced the company's intention to swap existing 2016s and 2017s for a new amortising 2020 issue.

If successful, the transaction will provide much-needed breathing space to the state-owned company, which faces billions of dollars in bond maturities over the next year or so.

In the swap, PDVSA is targeting the 5.125% 2016s, the 5.25% 2017s and the 8.5% 2017s. That amounts to about US$8.26bn in outstanding debt, according to Thomson Reuters data.

But many on Wall Street doubt that the company can pull off a transaction whose ultimate success rests on heavy participation from foreign accounts.

As of Thursday, few details had been announced, but analysts say that PDVSA will have to dangle some alluring incentives to bring international holders on board.

"They will have to make the economics work so it is not viewed as a distressed exchange, which I think they will want to avoid," one investor told IFR.

Getting holders to relinquish short-term debt that could benefit from a pull to par may be tough going, however, especially if investors don't believe a default is imminent.

The 2016s were trading at a mid-market price of 94.95 on Thursday, while the old and new 2017s were respectively quoted at 73.00-74.00 and 78.80-79.60, according to Thomson Reuters data.

"You are forfeiting [up to] 28 points for being in the trade," said Siobhan Morden, head of Latin American strategy at Nomura, who thinks investors will have to be generously rewarded for giving up that capital gain.

Pricing on a new 2020 is still a matter of speculation. But Morden calculates it should come at 62 on an 8.75%-9% coupon, while Citigroup analysts have prices ranging from 50 to 52 depending on the coupon.

At that level, investors are still accepting a dollar price well above what most would consider recovery values, exposing holders of the new bonds to further downside in the event of default.

And while a successful swap will provide some short-term debt relief, the risks of a credit event are still very real over the medium term.

"You can kick the can down the road, but they need the oil prices to be more favourable and policies that the financial burdens," said Sean Newman, a senior portfolio manager at Invesco.

FAR FROM CERTAIN

For a country still grappling with severe economic and political crises, such an outcome is far from certain - as is a bounce in crude prices.

To make the transaction NPV positive for investors, PDVSA would also have to issue 1.4-2.0 times more bonds for every dollar of debt retired, according to Citigroup.

The bank calculates that an exchange of this type could lead to over US$10bn in extra debt amortisation between 2017 and 2020, heightening the risks of a credit event further down the road.

Collateral in the form of shares of Citgo, PDVSA's US unit, which Del Pino also announced this week, may act as a sweetener, but few believe this will tip the balance and many doubt whether such a structure would work at all.

Valuing such stock may prove difficult given that Citgo shares have already been pledged on an earlier bond offering from the US-based borrower.

"Clients are somewhat concerned about the collateral," said Morden. "On the Citgo bonds there are some covenants that restrict pledging collateral."

A preliminary prospectus supplement seen by IFR when Citgo was marketing its 2020s bonds showed that a pledge of Citgo Petroleum stock was increased from 49% to 100%.

"One has to question the nature of the collateral and where it has been pledged," said a buyside trader.

"With another US$7bn of debt [collateralised with equity] there would obviously be material dilution. At this point, it is hard to quantify the extent of participation from external bondholders."

LIMITATIONS

Robert Matz, an analyst at Covenant Review, agrees that there would be significant limitations in pledging shares of the operating company under the terms of the holding company's bonds, but it may work with shares from the holding company.

"If the idea is to pledge holdco shares - the entity that owns the opco shares - it is not subject to covenants under the holdco or opco bonds as long as the change of control put is not triggered," he said.

Ultimately, however, foreign participation is expected to come down to whether the transaction is net present value-positive for investors.

"I don't think anyone cares about the Citgo shares," said a second investor. "I would price this as a normal bond, looking at the exchange ratio and whether it is NPV positive." (Reporting by Paul Kilby and Davide Scigliuzzo; Editing by Matthew Davies)

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