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Petroleos de Venezuela bond buyback: conflicting views

By Gustavo Coronel

July 1, 2004 - The recent decision by PDVSA to buy back up to USD $2.5 billion and €88 million euros in bonds, which mature in 2006 and 2008, has been analyzed in very different ways by the experts. These differences range from open praise to strong accusations of corruption or mismanagement. I guess this goes to show that finance is not an exact science.

Oliver Campbell, in Petroleumworld.com confesses to being taken by surprise by the move and says that he did not expect the government to do this "rather than using the bonanza from higher oil prices to fund their ambitious social program. . . . The government is to be commended for their bold action."

However, VenEconomy Today claims, "it is inexplicable that, if PDVSA has admitted that it has an investment program that is falling behind schedule, it is using that money to buy back debt with a good profile and that is easily payable given the company's cash flow. It would be more logical to allocate the money to the investment plans in order to maintain and improve production capacity."

Miguel Octavio, in The Devil's Excrement, calls this buyback "bizarre" and intimates that this is the type of operation in which immense corporate and/or personal fortunes are made. He says: "Two weeks ago demand for these bonds began increasing and prices followed, with some international brokers looking for fairly large amounts. . . . The daily volume being traded rose dramatically. . . . On June 15th alone more than USD $300 million were traded in PDVSA bonds, an incredible 12% of the total amount outstanding." It was days later, Octavio adds, that PDVSA announced the buyback. Somebody or "some bodies" had access to the information beforehand and went on to gain millions without any risk. Octavio adds that another possibility to explain this operation is to avoid future US registration and filings, if future bonds are issued locally, to be acquired in Bolivar's. I would not comment on this, since I am no financial expert, except to say that PDVSA is eager to escape the scrutiny of outside agencies which forces them to be transparent. Chávez considers transparency the enemy number one of his government.

VenEconomy asserts that the bonds were bought back at 78% to 85% of their value, a few days before the government is buying them back at 91% of their value. Whoever bought one million dollars in these PDVSA bonds on June 25th made a $130,000 profit within days. This is an amount that takes about 7 years to save for any honest, high-ranking public servant. VenEconomy asks the question: "Who were the fortunate ones?"

Oliver Campbell raises a red flag when he says: "I trust, however, this decision was taken on solid financial grounds because PDVSA will have to borrow funds again in the future to finance its capital investment. Hopefully it can borrow at cheaper rates. . . ." VenEconomy is far from sure that this will be the case, because they seem certain that PDVSA will have to borrow in the future at higher cost. Miguel Octavio agrees that PDVSA will have problems borrowing in the future at lower interest rates. He says that the main reason for PDVSA to do this buyback has to do with the problem of having to submit its financial statements to the Securities and Exchange Commission. By selling the bonds the requirements to file with the SEC disappear! In this sense they would escape accountability and transparency, although at the high price of becoming a corporation without international credibility.

This interpretation coincides with the carefree announcement by Ali Rodríguez that PDVSA will not be able to present its financial statements to the SEC on time, the second consecutive year that this happens. He probably was ashamed the first time around but now he is impudent. It does not mean much to a tiger to grow a new stripe (Que es una raya mas pa'un tigre?).

An unidentified high ranking US official, talking two days ago at the National Press Club in Washington, DC said: "Venezuela is no longer a reliable oil supplier to the US." This seems to be the end result of the managerial and operational deterioration of PDVSA, as illustrated by the "bold" and highly controversial financial decisions being taken by this company with our national monies.



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