GBRV AND PDVSA CHANGE TERMS OF PDVSA BOND ISSUANCE

UNCLAS CARACAS 001362 SENSITIVE SIPDIS ENERGY FOR CDAY AND ALOCKWOOD HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR MKACZMAREK NSC FOR DRESTREPO AND LROSSELLO USDOC FOR 4332 MAC/ITA/WH/JLAO E.O. 12958: N/A TAGS: ECON EFIN EPET VE SUBJECT: GBRV AND PDVSA CHANGE TERMS OF PDVSA BOND ISSUANCE REF: A. CARACAS 1340 ¶B. CARACAS 852 ¶1. (U) PDVSA announced on its website October 22 three changes related to its USD 3 billion bond issuance originally announced October 16 (ref A). First, the Ministry of Economy and Finance (MEF) will exempt from taxation interest paid on the bonds. Second, the Central Bank (BCV) will not require financial institutions to count the bonds toward their position in foreign currency. (Note: The BCV limits a bank's net position in foreign currency to 30 percent of its capital. End note.) Third, PDVSA extended the cut-off date for receiving offers from the afternoon of October 22 to the afternoon of October 23. At some point previous to the announcements noted above, PDVSA put on its website a press release claiming a "positive response from investors" for the bonds and "ratifying" the terms and conditions previously established. ¶2. (SBU) Press reports indicate brokerage houses saw limited interest in the bonds as of October 22. Analysts have estimated the implicit exchange rate of the bonds (which are dollar-denominated but will be purchased in bolivars) to be higher than the current parallel exchange rate of 5.1 bolivars/USD, thus making it more attractive to purchase dollars in the parallel market than to buy the bond. An executive at one of Venezuela's largest brokerages told Econoff October 21 that the issuance was "tanking" and that no "when and if" market had been established. (Note: A "when and if" market refers to a deal between a potential Venezuelan buyer and an international investor, whereby the potential Venezuelan buyer agrees to sell the international investor the bond on a given date at a given price assuming the bond is actually issued. Entering into a "when and if" agreement is a way for a Venezuelan buyer seeking to acquire dollars to lock in a dollar value, thus eliminating price risk. End note.) ¶3. (SBU) Comment: PDVSA and Venezuelan government (GBRV) officials are clearly concerned that the bonds are not attracting sufficient interest. The exemptions and exceptions offered by the MEF and BCV will make the bonds somewhat more attractive to local investors and particularly to banks, though it is unclear if they will be attractive enough to make the issuance a success. This marks the second time in a row PDVSA has had to change the terms of an issuance (see ref B for the prior issuance). End comment. DUDDY