PDVSA’s Peculiar Oct. ’22 Bond May Carry Elevated Risks

Sat Sep 02 00:00:00 EDT 2017
By Timothy McKenna and Raphael Starr

In late May 2017, it was reported that Goldman Sachs, on behalf of clients of its asset management unit, had bought US$2.8 billion in face value of a US$3 billion bond issued by Petróleos de Venezuela, S.A. (PDVSA), the Venezuelan state-owned oil company. It was later discovered that the broker-dealer arm of Japan’s Nomura Group had bought US$100 million in face value of the same bond as part of the same transaction. For various reasons, the transaction was so controversial that some Venezuelan opposition leaders have threatened to repudiate the “Oct. ’22 Bond,” the final principal repayment of which is due in October 2022, should they come into power.

In “PDVSA’s Peculiar Oct. ’22 Bond May Carry Elevated Risks,” NERA Associate Director Timothy McKenna and Senior Analyst Raphael Starr analyze market prices for the bond and assess what, if anything, the prices indicate about the bond’s future should PDVSA enter bankruptcy. Doubts about the bond’s recovery value may play a role in its relatively high yield. Apart from the Venezuelan opposition’s threats of repudiation, some creditors of PDVSA may call for a bankruptcy court to treat the Oct. ’22 Bond as having original issue discount (OID), which would render claims for the unaccrued portion of OID disallowable. As the bond may not have been issued at par in an arm’s length transaction, the authors conclude that the recovery value of the bond relative to par may be lower than that of other senior unsecured obligations of PDVSA.