PdV staring down bankruptcy path – Argus Media

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Venezuelan state-owned PdV's foundering effort to restructure its dollar-denominated debt is stirring questions over how the oil company would manage a looming breach of its financial obligations.

Today is the latest deadline on PdV's offer to restructure near-term debt. The company twice extended the deadline to try to persuade skeptical bondholders to participate.

PdV wants to exchange up to $7.1bn of bonds maturing in 2017 for a new 2020 bond. A combined $3.3bn of bond principal comes due on 28 October and 2 November. A further $6bn of bond principal and interest matures in first-half 2017, including $3bn in April, raising PdV's total bond payment obligations from October 2016 to 30 June 2017 to over $9.3bn.

Absent a restructuring, PdV does not have the cash reserves to fulfill these scheduled payments. The company said before the most recent deadline extension that substantially less than a 50pc threshold of bondholders had agreed to participate so far. The participation rate as of 14 October was less than 40pc, an energy ministry official said.

The weak turnout, reflecting bondholders' lack of confidence in the company's future ability to honor the debt and in the integrity of the transaction itself, suggests that PdV will be forced to choose between an orderly or disorderly default, local and overseas attorneys and financial analysts say.

One orderly scenario gaining credence would involve PdV seeking legal protection from its creditors in a Venezuelan court. From there PdV would file petitions in the US and other legal jurisdictions seeking a debt standstill ruling that would prevent creditors from trying to seize the company's overseas assets, including its US downstream subsidiary Citgo. PdV's attorneys likely would argue before a US court that a standstill ruling is needed to allow PdV to continue operating internationally while it engages creditors in restructuring talks.

PdV's lawyers would argue that Venezuela is the only valid jurisdiction to hammer out a debt restructuring with creditors. But Venezuela's commercial code does not include provisions for US-style business reorganization and debt restructuring. Instead, Venezuela's commercial code provides for the liquidation of companies that are insolvent and in arrears on their debts.

The process can easily take a decade or longer in Venezuela's notoriously slow and corrupt courts. PdV is likeliest to pursue such a course that allows it to continue operations without fear of asset seizures, while it deploys lawyers in Venezuela and the US to delay rulings and judgments in the hope of a strong rebound in oil prices.

The risk for the Venezuelan government is that a prolonged multi-jurisdictional legal process would exacerbate the huge political fallout of a bankruptcy declaration itself, although the Venezuelan government has proved adept at messaging in increasingly adverse circumstances.

On the other hand, a messier unilateral cessation of payments could spill over onto market perceptions about the risks of Venezuela's sovereign debt and impact the company´s day-to-day oil operations.

PdV accounts for about 80pc of the $15bn of total sovereign and PdV bond principal and interest payments due from October 2016 through end-2017. Venezuela's total foreign debt is over $120bn, the central bank says. The government has less than $12bn in hard currency reserves.

It is also possible that PdV could be bailed out by strategic partners such as China and Russia.

Rosneft this month agreed to invest $20bn in five Orinoco upstream joint ventures with a combined output of 170,000 b/d.

Beijing has lent Venezuela more than $50bn in oil-backed loans over the past decade, part of which has already been retired.

PdV´s other foreign partners have also stepped in recently. Repsol this month also opened a $1.2bn line of credit for its Petroquiriquire joint venture to double mostly light crude output to 60,000 b/d within five years. Most of the production increase is earmarked for blending with Orinoco extra-heavy crude by the PetroCarabobo venture in which Repsol holds an 11pc stake.

The government of President Nicolas Maduro is hoping to stay afloat financially as oil prices gradually head north, a trend it expects Opec will accelerate by implementing a production freeze or coordinated production cuts at its 30 November meeting in Vienna. Non-Opec Russia is seen as joining the agreement as well.

Maduro said last week that even $70/bl oil is too low a price, and called for a 10-year market stabilization pact between Opec and non-Opec producers with the aim of sustaining significantly higher oil prices and wresting control of prices and markets back from "speculators."

Venezuela's average weekly oil price closed at $43.09/bl for the week ending 14 October, and PdV's year-to-date export price averages $33.77/bl, the energy ministry reports.