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Cablegate: Pdvsa's Mega Usd 5 Billion Bond Issue

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RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #0667/01 0891803
ZNR UUUUU ZZH
R 301803Z MAR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8264
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE
RHEBAAA/DEPT OF ENERGY
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 CARACAS 000667

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD

E.O. 12958: N/A
TAGS: EFIN EPET VEN
SUBJECT: PDVSA'S MEGA USD 5 BILLION BOND ISSUE

REF: A. 05 CARACAS 2596

B. CARACAS 183
C. CARACAS 305
D. CARACAS 448
E. CARACAS 493

1. (SBU) SUMMARY: On April 12 PDVSA is scheduled to issue USD
5 billion in debt. This bond sale represents the largest
issuance of debt in Venezuelan history, and one of the
largest for emerging markets. The bonds are
dollar-denominated Eurobonds and will almost certainly be
resold by most local buyers in secondary markets outside
Venezuela to obtain dollars. The announcement has driven the
parallel market rate down from nearly Bs 4000/USD to around
Bs 3500/USD. The low yield and inherent risks associated
with these bonds means that buyers do not have the guaranteed
return they did with the previous "bonos del sur" sale. The
issuance size, in today's high oil-price environment, points
clearly to Chavez' reliance on PDVSA as the BRV,s cash cow,
and to how little freedom PDVSA has had to invest in its own
operations. END SUMMARY.

2. (SBU) After months of speculation, Minister of Popular
Power for Energy and Petroleum (MPPEP) Ramirez announced on
March 22 that PDVSA would issue USD 5 billion in bonds in the
coming weeks. The bonds, a combination of three securities
with maturity dates of 2017, 2027, and 2037 and yields of
5.25 percent, 5.37 percent and 5.50 percent, respectively,
are scheduled to be allocated on April 2 and issued on April
12. The minimum purchase is USD 1000, which provides USD 400
worth of bonds maturing in 2017, USD 400 maturing in 2027,
and USD 200 maturing in 2037. These Eurobonds are dollar
denominated and pay interest and principal in dollars. They
will be sold locally at 105.5 percent of face value at the
official exchange rate (Bs 2150/USD) and are tax-free in
Venezuela. The lead bank is ABN AMRO, and the bonds will
initially be quoted on the Luxembourg exchange. The bonds
are not registered with the SEC and thus cannot be traded
within the United States until 40 days after issuance.

3. (SBU) The bond issuance is ostensibly to "stimulate
internal savings through a secure investment for Venezuelans
and their direct participation in the petroleum industry,"
though most purchasers are surely more interested in
obtaining dollars to get their money to a safe harbor outside
of Venezuela, rather than participating in the local
petroleum industry. PDVSA has been accruing substantial debt
lately; having also recently obtained USD 1 billion in
financing from BNP Paribas (reftel C) and USD 3.5 billion
from a consortium of Japanese groups (reftel D). Ramirez
announced that the offering would be targeted at "small
investors, workers' saving accounts, pension funds, medium
investors, companies, and large investors." (COMMENT: While
running the gambit of anyone potentially having funds to
purchase a bond in Venezuela, it also calls into question
whether pension funds or savings accounts should hold junk
bonds. END COMMENT.)

4. (SBU) Standard and Poors and Fitch Ratings both rate the
issuance at BB- (barely junk status). Given the low yield
offered by these bonds, they will trade at a discount to face
value. The economic daily "Reporte" estimates that discounts
will range from 81 percent of face value (2017) to 73 percent
(2027) to 70 percent (2037), which gives the aggregate a
trading discount of 76 percent of face value (read: a USD
1000 bond will be resold for USD 760). Combining the sale
price, commissions, and eventual discount when sold abroad
yields an exchange rate value of Bs 3044/USD. JP Morgan
estimates a slightly lower discount of 78.6 percent of face
value. In general, analyst estimates of the implicit rate
based on the eventual discount range between 2900 and 3200
bolivars/dollar. The current parallel market rate is
hovering around Bs 3500/USD, demonstrating that an arbitrage
potential exists, though one no where near the size of the
"bonos del sur" issuance, which cost around Bs 2800/USD
during a time when the parallel rate was nearly Bs 4000/USD
(reftel E).

5. (SBU) The parallel market for dollars has fallen since the
announcement from Bs 4000/USD to Bs 3500/USD. Unlike the

CARACAS 00000667 002 OF 003


recent "bonos del sur" issuance, it seems likely that the
PDSVA bonds will, at least temporarily, meet some of the
foreign exchange needs in the Venezuelan economy. The
Commission for the Administration of Foreign Exchange
(CADIVI) approvals shot up from an average of around USD 90
million daily in 2006 to USD 142 million daily in January to
USD 166 million a day in February (though in March are
running closer to the average of USD 90 million daily) and
this may have also relieved pressure on the parallel market.
Additionally, it is tax season in Venezuela and many wealthy
Venezuelans are converting dollars back into bolivars in
order to pay their income tax obligations.

6. (SBU) 500,000 Venezuelans and Venezuelan companies have
applied for an allocation and similar to the "bonos del sur,"
many investors are submitting multiple requests using
identity documents from friends and co-workers. One
brokerage contact estimated that the ten brokers in her
office had together submitted 1,600 requests just for
themselves. The President of a local multinational bank
estimated that individuals could receive as much as USD
10,000 each and corporations as much as USD 150,000. These
amounts would not be sufficient for corporations looking to
repatriate profits or obtain dollars for commercial-scale
imports. The Ministry of Popular Power for Finance (MPPF)
has already announced that it is planning a third round of
the "bonos del sur" and PDVSA has hinted that it may issue
more debt this year. By providing outlets to dollars, these
issuances have a guaranteed market within Venezuela, but at
some point the demand for Venezuelan debt in secondary
markets may be met, at which point the value of using these
bonds to get dollars will be offset by the heavy discount
required to unload them outside of Venezuela.

7. (SBU) Another BRV claim is that this issuance will work to
soak up excess liquidity and combat Venezuela's high
inflation, which has been over 20 percent during the past 12
months. While the bonds will temporarily remove USD 5
billion worth of bolivars from the Venezuelan economy, they
will likely return to the economy in the form of PDVSA
spending. PDVSA has said that it will convert the bolivar
proceeds to dollars through the Central Bank (BCV) and then
use those dollars to fund investment purchases abroad. This
would prevent the money from reentering the Venezuelan
economy, but we judge it to be unlikely. Almost all of
PDVSA's revenues are already in dollars, so it should have no
need for more dollars. In addition, by converting PDVSA's
bolivar proceeds to dollars, the BCV will be depleting
Venezuela's foreign exchange reserves by USD 5 billion (or
over 15 percent) overnight at the same time that the BCV is
supposed to be transferring an additional USD 4-5 billion to
the National Development Fund (FONDEN), severely crimping its
ability to manage the money supply and interest rates.

8. (SBU) PDVSA claims that this money is needed for
investment as part of its "Plan Siembra Petrolera" (reftel
A), which intends to invest USD 70 billion to double
Venezuela's oil production by 2012. A more likely scenario
is that this money will be used to pay current PDVSA
obligations, rather than fund future investment. There are
increasing signs that PDVSA is having cash flow problems
(reftel B) in view of its huge social spending obligations.
Many sources confirm that PDVSA has had trouble paying its
bills lately. In addition, its liabilities are growing.
PDVSA will pay about USD 840 million to nationalize the
Caracas and Margarita Island electrical utilities and will
need to compensate the companies in the Faja who will be
converted to 60-40 joint ventures on May 1. Contacts have
also told us that PDVSA will use the proceeds to pay its
joint venture partners in the former Operating Service
Agreement fields.

9. (SBU) COMMENT: The PDVSA bond issuance had been expected
since the end of 2006, but the timing nonetheless seemed a
little rushed (taking place in the middle of Holy Week when
most Venezuelans will be on vacation). PDVSA has not
published audited financial results for 2006; each time it
does produce financial information, the information tends to
contradict earlier published data. By not registering with
the SEC, PDVSA avoids having to provide a lot of

CARACAS 00000667 003 OF 003


documentation it may not be able to produce. The cash flow
problems that are plaguing PDSVA in part stem from its
massive obligations to the state (which totaled as much as
USD 39 billion in 2006) and a lack of financial controls.
Despite claims that the debt issuance is destined for
investment (which is woefully lacking), our expectation is
that most of the money will be used to pay off current
liabilities. Given Chavez's insatiable appetite for spending
and PDVSA's role as the cash cow for that appetite, it seems
likely that further loans and debt issuances will occur if
only to keep feeding the beast. With the USD 5 billion in
new debt, PDVSA's debt load will increase to about USD 12
billion, which remains quite manageable for a company that
had over USD 100 billion in revenues in 2006. END COMMENT.

BROWNFIELD

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