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Default circles PDVSA

For the past three/four weeks I’ve noticed a spike in Google searches for corruption-related Venezuelan names and PDVSA. Some of the world’s biggest and best known banks and accounting firms seem all too keen, suddenly, of finding out what’s going in Venezuela. It could well be related to PDVSA’s announcement of a $7 billion bond swap. But it could also be due to some persistent rumours about impending legal cases against PDVSA that could all but obliterate the company’s ability to meet its current international financial obligations, let alone future ones.

The rumours (unconfirmed) are that two big indictments are being prepared: one in Houston, related to massive (as in multi billion dollar) corruption in the style of Roberto Rincon and similar thugs centered in PDVSA; and the second, in the Southern District of New York, would allegedly be due to use of PDVSA as, basically, Iran’s off-the-books financial arm.

Got to clarify that, as of this writing, these are but rumours. The $7 billion bond swap dominates the headlines, and interested parties -if there are still some left out there- could be much worse than to read Russ Dallen’s “Top Ten Things to Know about Venezuela’s $7 Billion PDVSA Exchange Deal”, where, among other things, he says:

6. No Attorney, Law Firm or Counsel listed. Although the 442 pages of the document were clearly drafted by lawyers, on the back page of this document where they normally list them, there are no attorneys or investment banks listed. This is a worrying sign, in that no counsel for PDVSA, no counsel for Citgo, no counsel for the bondholders, no counsel for Venezuela and no counsel for the any of the Collateral Agents, Paying Agents, or Trustees is putting their name on this document.

7. No Investment Bank Listed. Likewise, there is no mention of the investment bank on the front or back pages of this deal. However, on page 43, Credit Suisse Securities (USA) LLC is named as the “financial advisor for the Exchange Offers.” (No counsel for them is listed there either, by the way). Among other caveats, the Credit Suisse portion also warns that “The financial advisor is not being engaged to and will not solicit any holders of Existing Notes in connection with the Exchange Offers. The financial advisor does not make any recommendation to holders of Existing Notes as to whether to exchange or refrain from exchanging their Existing Notes.”

The first “tell” in the above is that the cast of agency players in numbers 3–5 are not your normal A-list for a company of PDVSA’s size. For example, Glas — Global Loan Agency Services — is a relatively new entrant, having just been founded 4 years ago. On the other hand, Law Debenture, though it has been around since 1889, has lately been largely involved in large bankruptcy situations, such as GM (Chapter 11), Lyondell (Millenium America) (Chapter 11), American Home Mortgage (Chapter 11) and General Growth Products (Reorganization). Further, just last month it announced it was selling “substantially all of its corporate trust business to Delaware Trust Company” — so Law Debenture may not even be the Paying Agent in the end.

The second “tell” comes in numbers 6–7. When the lawyers and investment banks on your payroll wont put their name on the legal document, that is a huge flag. When not even the investment bank you are paying will recommend or sell the resulting financial product they created, well, either the standards on Wall Street are improving or the deal smells so bad even they can’t stand it.

Whatever the case, it is clear that PDVSA’s largesse has its days counted. Default danger ahead.