Caracas floats paying foreign debt in local currency

OREANDA-NEWS. October 21, 2016. A filing late yesterday before Venezuela's Supreme Court asks for an interpretation on whether distressed state-owned oil company PdV can pay its maturing dollar-denominated 2016 and 2017 bonds in local currency.

If the petition is ratified and PdV resorts to Venezuela's devalued local currency, the bolivar, to pay its debt, creditors could interpret this as a breach of covenant and a default on the company's obligations, depending on the individual bond terms. At the same time, such a move would raise questions about currency transfer and convertibility.

Even where the terms allow for local currency payment, bondholders would be at odds to exchange the bolivars into dollars. Venezuela has a tightly controlled currency exchange system, and dollars are scarce. The black market exchange rate is more than Bs1,200/US\\$, many times the multi-tiered official rates. The largest local denomination is Bs100, and inflation in the year to date is 600pc.

"Nothing surprises at this point," a US-based bond trader said. "They're obviously desperate, but the market already expects PdV will default."

PdV has over \\$3.4bn of bond principal due in less than two weeks, including \\$1.1bn on 28 October on a PdV 2016 bond, followed on 2 November by another \\$2.3bn of principal on a PdV 2017 bond on which \\$4.1bn of principal remained outstanding as of 16 September 2016. Another \\$3bn PdV 2017 bond matures on 12 April 2017.

A Supreme Court official confirmed that a filing was recorded late yesterday by the high court's political-administrative chamber requesting an interpretation of Article 128 of Venezuela's Central Bank Law.

The article in question states that "payments stipulated in foreign currency will be made, except by special convention, with the delivery of the equivalent in legal tender, at the rate of exchange current on the date of payment."

The filing explicitly asks the high court to interpret whether the article can be applied to three bonds including a \\$1.1bn PdV 2016 bond due on 28 October, and two PdV 2017 bonds with a combined \\$7.1bn of principal outstanding as of 16 September 2016.

It is unclear if the court petition was made by Venezuela's government, PdV or an independent third party acting on behalf of the government. The court official declined to comment on the filing entity, but said it has not been officially accepted by the court for judicial consideration.

Venezuela regularly pays its sovereign and PdV bond debts in dollars, the currency of the original issuances.

But PdV may have Venezuelan jurisprudence and precedent in its corner, according to a local attorney whose law firm over the past 20 years has successfully litigated similar cases.

The attorney said his law partnership, which does not represent PdV or the Venezuelan government, has litigated "hundreds of cases in which Venezuelan individuals and companies with large dollar debts they could not pay won Venezuelan court judgments allowing them to legally settle those debts in local currency at the prevailing exchange rate on the settlement date."

Yesterday's filing is the latest indication that PdV is preparing to seek some kind of legal protection in Venezuelan courts to avoid paying its bondholders up to \\$8.2bn of debt principal currently outstanding on its maturing PdV 2016 bond and its two PdV 2017 bonds.

The amount of principal currently outstanding on these three PdV bonds is equivalent to almost 69pc of the central bank's current hard currency reserves of \\$11.93bn.