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PDVSA bonds drop on lawsuit, exchange

WASHINGTON, Oct 7 (IFR) - The fate of a debt swap from PDVSA was thrown in doubt on Friday after the Venezuelan oil company extended the deadline for the transaction and ConocoPhillips sued over the use of Citgo shares as collateral.

PDVSA bonds suffered a multiple point drop as investors expressed concern that a failure to extend maturities on short-term debt would bring the state-owned company closer to a restructuring.

"We could be back to square one with an intense redemption calendar that makes it hard for PDVSA to cover," an investor attending the IMF and World Bank meetings in Washington told IFR.

Intensifying the focus on the troubled oil exporting nation, Venezuela's central bank head Nelson Merentes was scheduled to attend a small gathering with investors organized by Deutsche Bank on Friday afternoon.

Venezuelan bonds opened several points lower on Friday, with the 2017 notes initially down five to six points and the rest of the curve opening three to four points weaker, according to one trader.

They later clawed back roughly half of their intraday losses on the expectation that PDVSA may have to improve the terms of the offer for the second time since the exchange was launched on September 16.

PDVSA's decision on Thursday to extend the early tender deadline of the swap to October 12 suggested to many that the company had received an underwhelming response to its offer, which targets US$7.1bn of bonds maturing in 2017.

"As of the prior early tender deadline, substantially less than 50% of the aggregate principal amount of the existing notes have been tendered," the company said Thursday.

PDVSA sweetened the transaction last month when it offered more new 2020 bonds backed by shares of its US oil unit Citgo in exchange for bonds maturing in 2017.

The new terms were largely viewed as net present value (NPV) positive, but some investors preferred to hold existing bonds to benefit from the initial secondary pop on news of improved terms and the prospects of getting paid at maturity.

"We are going to be free-riders," said a second investor at the IMF meeting, who noted that his Venezuelan holdings were his second-largest contributor to performance this year.

But gains were reduced by the sell-off Friday sparked by the extended deadline and a lawsuit filed by oil producer ConocoPhillips against PDVSA in a Delaware court the day before.

"This could be a bargaining tactic to dissuade some of the free-riders," said Sean Newman, a senior portfolio manager at Invesco.

In the complaint, ConocoPhillips said PDVSA's pledge of equity in Citgo as collateral for the bond swap was part of a fraudulent scheme to prevent Conoco from collecting compensation in an ongoing dispute with the Venezuelan government.

The news was seen further complicating the swap and exacerbated worries about the sovereign, which already faces several arbitration claims from foreign companies.

"It has become very complex legally," the first investor said.

Others think that the latest claim from ConocoPhillips won't necessarily sabotage the exchange.

"This is not the first time that this kind of suit has been made," said Newman. "Whether or not it can stop the exchange, it is hard to say." (Reporting by Paul Kilby and Davide Scigliuzzo; Editing by Marc Carnegie)

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