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Venezuelan Bond Swap Deal: Good News For U.S. Refiners

Fears of a possible default by Venezuela’s cash-strapped oil company PDVSA have mounted in recent weeks, but can now rest easy, after Venezuela managed to get credit holders to agree to a swap of $2.8 billion of the $5.325 billion in bonds it was looking to extend.

The swap comes after the state-run giant had extended the offer to bondholders three times, in an effort to swap the US$5.325 billion worth of notes due in 2017 for new notes maturing in 2020. The offer was accepted by some creditors this time around because it agreed to sell off lucrative Citgo Petroleum Corp—PDVSA’s U.S. unit.

While the $2.8 billion falls short of the $5.325 billion goal, it does give the company just enough cash to maybe extend its life through 2017, although swaps traders are pricing in a 51 percent probability that the company will still default sometime in the next 12 months, according to Bloomberg.

A potential PDVSA default would not only further hurt the company—and Venezuela’s devastated economy; it would also affect PDVSA’s foreign customers, including the United States.

The U.S. refineries on the Gulf Coast would be one of the first to be affected, because creditors would try to claim payments made in the U.S., analysts reckoned prior to the bond swap’s approval.

According to figures by the U.S. Energy Information Administration (EIA), the U.S. Gulf Coast imported 278.3 million barrels of crude oil from Venezuela last year. Venezuela was the top foreign crude oil supplier to the Gulf Coast refineries, a Bloomberg table compiled from EIA data showed.

If PDVSA were to default, it would likely keep its domestic refinery assets, but creditors would likely claim payments in the U.S. and oil shipped outside Venezuela, analysts told Bloomberg.

“If PDVSA defaults, there could be a disruption of oil supply to the U.S. as creditors may try to seize payments made in the U.S.,” Lucas Aristizabal, a senior director at Fitch Ratings, said in a phone interview with Bloomberg.

In addition, Mara Roberts, a New York-based analyst at BMI Research, told Bloomberg in an e-mail:

“Oil tankers could also potentially be at risk, with those carrying Venezuelan crude likely to face attachment claims upon arrival. This could discourage take up of PDVSA’s shipments.”

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Shortly after the company first announced the tender offer, Standard & Poor’s had downgraded the Venezuelan company’s credit rating and said that the bond swap, if carried out, would be “tantamount to default”.

Fitch Ratings also added to the gloomy expectations, saying that its ‘CCC’ rating on Venezuela’s state-held company “suggests a real possibility of default”.

As if a looming default and low oil prices were not enough to undermine PDVSA, last week a report by a Venezuelan commission said that US$11 billion went missing from the company when its was led by Rafael Ramirez between 2004 and 2014. The head of the comptroller commission and a member of one of the opposition parties, Freddy Guevara, described the report in a

as ‘the major corruption case in Venezuela’s history’.

However, the Socialist regime may bury this allegation as another ‘mudslinging campaign’.

Still, some facts about the company’s dire cash position are indisputable. Low crude prices in the past two years have crippled PDVSA’s cash flows and continue to weaken its ability to repay existing debt.

So PDVSA, as well as Venezuela, desperately needs oil prices to increase in a sustainable and substantial way, soon. With crude prices now barely holding on to above US$50, Venezuela - holder of the world’s largest crude oil proved reserves - is pushing for an OPEC deal to limit production and prop up prices.

Related: Oil Prices Slammed As Dollar Suddenly Breaks Out

However, it will not be Venezuela that will tip the scales in favor of a deal. It will have to accept what major OPEC producers - Saudi Arabia, Iraq and Iran – serve up for discussion at the November 30 meeting in Vienna. As of October 24, a deal looks further away as Iraq now says it wants to be exempted from cuts.

PDVSA is still staring $6.1 billion of principal payments in the face, due by the end of 2017. Should a default occur, the U.S. Gulf Coast refineries may have to increase foreign oil imports from Mexico, Canada, and, even Saudi Arabia, if refineries are suited to process their grades.

By Tsvetana Paraskova for Oilprice.com

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