Weeks before the deadline of a mega-buyback, a unit of state-owned oil giant Petroleos de Venezuela announced that investors representing nearly 96% of US$2.6 billion in structured bonds had tendered their paper via leads JPMorgan Securities and Deutsche Bank Securities, well above the 51% minimum (see table p. 22). To many, the deal's success was a foregone conclusion, given the fat premiums offered over market prices and the fact that covenants would be changed for any non-retired debt (see ASR 7/5, p.1).

Whether those covenant changes would harm remaining bondholders hinged on how many would snub the offer. Had the success rate fallen closer to 51%, the holdout investors might have suffered from weakened covenants, including the removal of two key PDVSA-controlled customers, Citgo Petroleum and Hovensa, from the structure.

As such, some indecisive bondholders, no doubt, drew on good old-fashioned game theory. Even if they were not thrilled about the offering price, they might bail largely because they couldn't be sure what their peers were doing, sources said.

But now that the tender has crept so close to 100% - which it could theoretically still hit before the July 26 deadline - that, far from losing, the contrarians could end up enjoying the kind of overcollateralization most ABS investors only dream about.

"Given the estimated export volumes which will remain in the PDVSA Finance vehicle, the debt service coverage ratios will be well over 100 times," said Fitch Ratings in a press release reiterating its BB-' on the deal.

In Fitch's view, the drop in outstanding debt to a tiny fraction of its former volume more than offsets the covenant changes and replacement of Citgo and Hovensa with other companies.

The reporting of financials has also been relaxed, a move that probably comes as no surprise to critics of President Hugo Chavez, who have long contended that his administration sees little advantage in transparency. Still, many investors have felt for some time that transparency was already a casualty of Chavez's heavy-handedness. For the yield-loving diehards hanging on, less disclosure may be a gift horse.

The holdouts have another incentive to remain past deadline. In a release, PDVSA Finance said it would not pay the consent payment for changing the covenants to investors tendering after July 12, billed "the early tender date." (For fees, see table ASR 7/5, p.20.) In addition, some investors leveraged their purchase of PDVSA paper, said a source close to the deal. For them, the deal's sweeteners didn't override the cost of having the loan called.

Going forward, the vastly diminished crowd of bondholders will have tremendous leverage with the company, as such disproportionately heavy flow is channeled to the trust, according to one source. PDVSA will have a compelling incentive to buy them out. "I don't anticipate PDVSA will keep US$4 billion to US$5 billion worth of exports tied to something like US$100 million of debt," he said. "They'll find a way to get out of this, over the next year or so."

As of press time, Moody's Investors Service and Standard & Poor's had not released reports on the results so far. When the tender was announced, Moody's reaffirmed the bonds at Caa1' and S&P put their B+' rating on CreditWatch negative. - FO

Weeks before the deadline of a mega-buyback, a unit of state-owned oil giant Petroleos de Venezuela announced that investors representing nearly 96% of US$2.6 billion in structured bonds had tendered their paper via leads JPMorgan Securities and Deutsche Bank Securities, well above the 51% minimum (see table p. 22). To many, the deal's success was a foregone conclusion, given the fat premiums offered over market prices and the fact that covenants would be changed for any non-retired debt (see ASR 7/5, p.1).

Whether those covenant changes would harm remaining bondholders hinged on how many would snub the offer. Had the success rate fallen closer to 51%, the holdout investors might have suffered from weakened covenants, including the removal of two key PDVSA-controlled customers, Citgo Petroleum and Hovensa, from the structure.

As such, some indecisive bondholders, no doubt, drew on good old-fashioned game theory. Even if they were not thrilled about the offering price, they might bail largely because they couldn't be sure what their peers were doing, sources said.

But now that the tender has crept so close to 100% - which it could theoretically still hit before the July 26 deadline - far from losing, the contrarians could end up enjoying the kind of overcollateralization most ABS investors only dream about.

"Given the estimated export volumes which will remain in the PDVSA Finance vehicle, the debt service coverage ratios will be well over 100 times," said Fitch Ratings in a press release reiterating its BB-' on the deal.

In Fitch's view, the drop in outstanding debt to a tiny fraction of its former volume more than offsets the covenant changes and replacement of Citgo and Hovensa with other companies.

The reporting of financials has also been relaxed, a move that probably comes as no surprise to critics of President Hugo Chavez, who have long contended that his administration sees little advantage in transparency. Still, many investors have felt for some time that transparency was already a casualty of Chavez's heavy-handedness. For the yield-loving diehards hanging on, less disclosure may be a gift horse.

The holdouts have another incentive to remain past deadline. In a release, PDVSA Finance said it would not pay the consent payment for changing the covenants to investors tendering after July 12, billed "the early tender date." (For fees, see table ASR 7/5, p.20.) In addition, some investors leveraged their purchase of PDVSA paper, said a source close to the deal. For them, the deal's sweeteners didn't override the cost of having the loan called.

Going forward, the vastly diminished crowd of bondholders will have tremendous leverage with the company, as such disproportionately heavy flow is channeled to the trust, according to one source. PDVSA will have a compelling incentive to buy them out. "I don't anticipate PDVSA will keep US$4 billion to US$5 billion worth of exports tied to something like US$100 million of debt," he said. "They'll find a way to get out of this, over the next year or so."

As of press time, Moody's Investors Service and Standard & Poor's had not released reports on the results so far. When the tender was announced, Moody's reaffirmed the bonds at Caa1' and S&P put their B+' rating on CreditWatch negative.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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