As the lead graph indicates, that $13.5 billion level is now below the level of reserves of $14.176 billion on February 2, 1999, when Venezuela President Hugo Chavez was sworn into office. Worse, Venezuela’s reserves were $16.358 on December 30, 2015, meaning that the reserves have now fallen $2.859 in just the first 2 months of 2016.

The good news for Venezuela is that bond interest payments are below $300 million for March followed by the bad news that bond payments ramp up to $782 million in April and a little under a $1 billion in May (see our bond payment calendar here:

At the same time, Venezuela’s oil basket, which trades around $5-$7 below WTI, is $26.36 this week, averaging just $24.44 for the year so far. According to the U.S. Energy Information Administration, Venezuela exported 1.7 million barrels a day in 2014. Production has fallen since then, but 1.7 million barrels a day at $24.44 a barrel, means that Venezuela would have brought in $2.492 billion in revenue for January and February. Worse, that doesn’t include the cost of production, which is $13 a barrel according to PDVSA head Eulogio del Pino, meaning subtract $1.326 billion, leaving just $1.32 billion potential profit for January and February (caveat: former National Assembly head Diosdado Cabello says the cost is $21-23 a barrel but let’s use the lower number).

But wait it gets worse: China has already paid in advance for the 450,000 to 750,000 barrels a day it receives -- having loaned $50 billion to Venezuela – and of course, Venezuela has already spent that money, meaning you have to subtract another 659 million to $1.09 billion for January/February. In addition, there is the $13 cost of production for the other 600,000 to 800,000 used domestically where gas is almost free, which means subtracting another $468 to $624 million.

In back of the envelope terms, in the best case, Venezuela made just $193 million in January and February or in the abbreviated worse case, lost $403 million over the two months -- and don't forget that that is BEFORE debt payments.

In short, that is why Venezuela’s reserves are down $2.859 billion so far this year and down $10.623 billion from March 3 of 2015, when they were $24.122 billion.

Thanks again for your continued support of Latinvest. Please let me know if there is anything else we can assist with.


Gartman/Bloomberg/Barron's: As Venezuela Suit Defends Currency, Does Debt Default Loom?

Our exclusive, breaking news revelation of Venezuela's gold liquidation yesterday made headlines.  Bloomberg cited it (crediting the Latin American Herald Tribune), Barron's mentioned it, and even one of the great market gurus, Dennis Gartman, quoted from it in his world famous (and expensively exclusive) Gartman Letter today (I have attached today's Gartman Letter and the Barron's and Bloomberg pieces for your reading pleasure.  Please subscribe to Dennis' letter if you don't already -- it is worth every penny). Things are moving fast in Venezuela this week as the country makes huge debt payments.  As we noted yesterday, PDVSA had to pay $1.45 billion Wednesday and another $2.3 billion on Monday. In the meantime, yesterday, PDVSA head Eulogio del Pino presented PDVSA's first half revenues, fluffed, skewed and impossibly beyond belief in the time honored Bolivarian Venezuela tradition.  Unfortunately, while del Pino's predecessor Rafael Ramirez had a gift for being able to hide important parts of the financial equation, del Pino apparently lacks that ability.  (Ramirez, presently demoted to Venezuela's Ambassador to the UN in New York, is under investigation by the U.S. for corruption, according to my friend, former Caracas Daily Journal and current Wall Street Journal reporter/Latin American Bureau Chief, Jose de Cordoba investigates-venezuelan- oil-giant- 1445478342 ). Yesterday, del Pino reported PDVSA's revenues were $59.18 billion in the first 6 months of 2015, but that curiously production was 2.916 million barrels (including gas) and that exports were 2.416 million barrels per day.  These figures are too high, but even then, it was a big mistake for the rookie PDVSA head. We track Venezuela's oil price like hawks, even calling out PDVSA when they make mistakes, so we know Venezuela's average oil price was $49.59 for the first half of the year ( ).  Multiply $50 a barrel times 2.416 million barrels and you get $120.8 million per day in revenue.  $121 million times 180 days is $21.78 billion -- meaning there is no way that PDVSA had revenue of $59.18 billion -- three times what his own production numbers indicate -- in the first 6 months of 2015! And the most important tell: his statement that up to October 26, PDVSA - which is required to turn over all of its dollars to the Central Bank -- has sold just $11.9 billion to Venezuela's Central Bank for the whole year. "Lies, damned lies and statistics," said one of my heroes, Benjamin Disraeli. Be careful out there.


BARRON'S: As Venezuela Suit Defends Currency, Does Debt Default Loom?

Venezuela sold more of its gold in April and May, the most recent data released, according to Russ Dallen, an investment banker and editor of the Latin America Herald Tribune.

By Dimitra DeFotis

The Venezuelan government lawsuit against DolarToday explains: “Much of the world, including numerous members of the International Monetary Fund (“IMF”), engage in something that is both literally and figuratively quite foreign to the United States: the multiple exchange rate system … to achieve equalizing quasi-fiscal measures, financial stability in the form of macroeconomic shock absorption, and trade balance adjustments, among other things … One of these rates, “CENCOEX,” is reserved for the importation of goods deemed to be vital, such as food and medicine. That rate is currently 6.3 ($1.00 = VEF 6.30).”

The lawsuit explains the crux of the problem: in early 2015, Venezuela shifted the third tier of exchange rates, called SICAD II, to Simadi, a system that applies to securities obtained through banks and brokerages, and to tourists. That rate was “about 199 ($1.000 = VEF 199)” on Oct. 23, according to the suit. While this kind of inflation would be shocking to some, the government suit says:

These differentiated rates are “an expected consequence of the Republic’s policies to promote social inclusion of the poor and economic growth. Indeed, in an economy that exports little else besides petroleum and imports nearly all other goods (including foodstuffs and equipment necessary for the healthcare of its citizenry), the tiered exchange rates are critical.” The International Monetary Fund estimates Venezuela’s economy will contract 10% this year and inflation will reach at least 160%, the WSJ story says. So where does DolarToday’s 817 bolivars/dollar figure come from? It’s in the ballpark, according to Capital Economics, which points to a current black market exchange rate above 700 bolivars to the dollar (see chart), and says a debt default looms in Click Here to Continue Reading   Venezuela Is Selling Off Gold Reserves as Bond Payments Loom (1) 2015-10- 28 18:43:11.824 GMT By Sebastian Boyd (Bloomberg) -- In a sign of how Venezuela is growing increasingly desperate to acquire hard currency, a report released this week showed the country has been stepping up its sales of gold. The value of the central bank’s bullion holdings fell 28 percent at the end of May from a year earlier, while the spot price for the metal declined just 12 percent. The figures, while reflecting transactions that took place five months ago, underscore the efforts the government is taking to raise the cash to repay creditors and fund imports amid a punishing recession, inflation exceeding 100 percent and a collapse in the price of its main export, oil. With $3.5 billion of bond payments due this week and next, the cash-strapped country’s international reserves are hovering near a 12-year low of $15.2 billion, including gold holdings that totaled $11.8 billion at the end of May. Notes from Venezuela, which relies on crude for 95 percent of export revenue, are trading at distressed levels with swaps contracts pricing in a 96 percent chance of default over the next five years.

The latest figures support estimates that Venezuela had about $42 billion of total assets -- including off-budget funds -- at the end of the third quarter, of which $15 billion was liquid, Barclays Plc economist Alejandro Arreaza said by phone from New York. He said liquid assets will fall to about $8 billion by year end. The country and its state oil company have $12 billion in bond payments coming due next year. The central bank’s press department declined to comment on the decline in gold holdings. “The Bolivarian government has met all its international commitments, despite domestic and international attacks,” Finance Minister Rodolfo Marco Torres said in a Twitter post Wednesday, after Petroleos de Venezuela SA paid $1.4 billion of maturing bonds. The Latin American Herald Tribune reported the decline in gold holdings earlier.

For those picking dates in the Venezuela default pool, I have attached our calendar of when and exactly how much Venezuela and PDVSA must pay each day and month in U.S. dollar bond debt through the end of 2016. As the attached calendar indicates, Venezuela and PDVSA must pay $5.344 billion over the next two months. In 2016, they must pay another $10.493 billion. All told, Venezuela must pay $15.837 billion in dollar bond interest, amortizations and maturities between now and the end of next year, which is currently more than the country has in reserves. (Those bond debts do not include already awarded and upcoming ICSID and ICC expropriation arbitrations that add another $5 to $10 billion to the tab. Since September 2014, Venezuela has lost 5 arbitrations at the World Bank’s arbitration forum ICSID. Gold Reserve has a $750 million final judgment it is seeking to enforce and is looking to seize bond payment coupons in Luxembourg and now PDVSA ships via Mareva injunctions in England. ExxonMobil has a judgment of $1.6 billion. Owens Illinois has a $455 million judgment, with another suit still pending. Tidewater has a $46 million judgment. Flughafen Zurich has a $33.7 million judgment. And there are 17 suits still pending, including one from another Owens Illinois shareholder and from ConocoPhillips (COP), which will be nearing its judgment phase next year and is seeking at least $4.5 billion for its 3 expropriated ventures. COP has also launched a related ICC arbitration over the loss of its investments).

Still, $15.35 billion in reserves is an amount that could almost cover the $15.837 billion in debt obligations through December of 2016. But there are a few wrinkles in Venezuela’s reserves that give pause. First, Venezuela’s reserves are mostly made up of gold. As of March 31, 2015, Venezuela had approximately $13.091 billion of its reserves in gold (divide the “Oro monetario” figure of 82,473,624 bolivars by the official rate of 6.3 bolivars to the dollar).

So, if we assume Venezuela’s gold level is still close to that $13.09 billion of $15.347 billion in reserves, it would mean that Venezuela has just $2.256 billion in liquid reserves. But, the situation is more complicated than that. As we reported in June -- when Venezuela first borrowed money from the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) account -- Venezuela counts money it can borrow from the IMF as part of its reserves [All of which adds a layer of extra absurdity to Venezuela President Nicolas Maduro’s call to jail Polar head Lorenzo Mendoza after Mendoza and former planning Minister Ricardo Hausmann were illegally recorded discussing the need to ask the IMF for economic assistance for the country (LAHT here)].

So far this year, Venezuela has borrowed 1.347 billion SDRs, which is just under $2 billion dollars (An SDR is made up of 4 floating currencies and is about US$1.47638 per SDR at the moment). Venezuela has the ability to borrow 912 million SDR more, meaning that $1.346 billion of the $2.256 billion of its liquid reserves it counts is IMF money, leaving Venezuela with just $910 million in liquid reserves. (And even those may not be all in cash, as Venezuela changed the Central Bank law last year to include “diamonds, and other precious stones and metals”. You can read more about that in our Latinvest May 26 Venezuela Report where we first identified the IMF borrowing here and our Latinvest July 9 Venezuela Report where we identified further IMF borrowing here).

Two weeks ago, in an attempt to soothe market concerns as the country enters this difficult period of payment stress, Venezuela Finance Minister General Rodolfo Marco Torres met with investors in New York and told them that “government entities” “hold” 20 – 25% of the country’s debt stock. Venezuela has also said that it has bought back some of the bonds maturing over the next 2 weeks. (Bloomberg here). A couple of caveats: First, Venezuela said roughly the same thing last year – that everything was under control and that it had purchased a significant portion of the bonds maturing in October 2014 as well -- yet PDVSA had to issue $3 billion in a new U.S. dollar bond to the Central Bank later that same month. But, to analyze the comments of Marco Torres at face value, that would mean he is saying that Venezuela “holds” 20-25% of its $70 billion in existing debt. First, the key word is going to be “holds” as in March, the government ordered private banks to transfer all bonds – whether they are held abroad or locally to the Central Bank for custody. (Bloomberg here).

Second, that $3 billion in PDVSA 6% of 10/28/2022 that PDVSA issued to the Central Bank last year after telling markets that there was nothing to see here still lies in the coffers of the Central Bank, as Venezuela has been unable and/or reluctant to sell it into markets where it would fetch just 36 cents on the dollar (where the similar PDVSA 6% of 2024 and the PDVSA 6% of 2026 currently trade). Third, when Marco Torres used “government entities,” he would also be including PDVSA and other pension funds and banks. Fourth, we are unsure of whether he is including domestic debt, including massive PDVSA debts to the Central Bank and at what FX rate. In short, caveat emptor.

Venezuela’s Money Supply Doubles Venezuela also hit a milestone this week. M2 money supply has now more than doubled in the last 52 weeks. As of October 2, M2 is currently Bs3.13 trillion, up Bs1.57 trillion in one year (100.3%!). At the same time, the free market currently demands 780 bolivars to purchase 1 U.S. dollar. On October 2, 2014, the free market required only 101.5. Crunch time indeed. You can find the Latinvest Debt Calendar online here: Thanks again for your continued readership and business. Please let me know if there is anything else we can assist with.


Do you know what Latin phrase is conspicuously absent from the terms in the 266 page Offering Memorandum for Argentina’s new $15 billion, 3 tranche, 2 phase international capital markets re-capitalization bonds?

Pari Passu.

Yes, “pari passu.” Actually, the term – which means “equal footing” – is in the new Argentina Prospectus a whopping 46 times, but NEVER as an actual term of the contract for THESE bonds -- it features mainly in the “how we got here” and “how we are going to get out of here” sections. (To read the Financial Times on how our clients made almost 6 times their investment on this trade, click here). In fact, as might be expected for 2 little words that the lead plaintiff -- Harvard lawyer Paul Singer and his hedge funds Elliot Associates and NML -- has been using effectively since 1996 (when Elliot got a similar injunction from a court in Brussels that subsequently forced Peru to pay up), Argentina goes out of its way to say that there is NO Pari Passu with these bonds:

The Bonds will constitute direct, general, unconditional and unsubordinated obligations of the Republic, for which the full faith and credit of the Republic is pledged. The Bonds rank and will rank without any preference among themselves and equally with all other unsubordinated public external indebtedness (as defined below) of the Republic. It is understood that this provision will not be construed so as to require the Republic to make payments under any series of the Bonds ratably with payments being made under any other public external indebtedness. (emphasis ours, p.195).

At the same time, Argentina is not able to get around part of the concept behind pari passu and gives a negative pledge promising not to subordinate the new bondholders without their permission: The Republic has agreed that, except as set forth below, as long as any of the Bonds remain outstanding, it will not create or permit to subsist any security interest (e.g., a lien, pledge, mortgage, deed of trust, charge or other encumbrance or preferential arrangement that has the practical effect of constituting a security interest) in its revenues or assets to secure its public external indebtedness, unless the Bonds are secured equally and ratably or have the benefit of a security, guarantee, indemnity or other arrangement approved by the holders in accordance with “—Meetings, Amendments and Waivers—Collective Action” below. (emphasis ours, p.198) Which highlights another change in the inverse -- What term does this bond have that the original holdout bonds did not?


The other game-changing term that, along with pari passu, has forced Argentina to this point is CAC – the Collective Action Clause – and unlike the CAC’s absence from the debt that Elliot and the holdouts have used to force this payout, bondholders can find CACs highlighted on the FRONT COVER of the new Prospectus – with a level as low as 50% to force the modification or acceptance on the whole: The Bonds will contain provisions, commonly known as “collective action clauses.” Under these provisions, which differ from the terms of the Republic’s public external indebtedness issued prior to the date hereof, the Republic may amend the payment provisions of any series of debt securities issued under the Indenture (including any series of the Bonds) and other reserved matters listed in the Indenture with the consent of the holders of: (1) with respect to a single series of debt securities, more than 75% of the aggregate principal amount of the outstanding debt securities of such series; (2) with respect to two or more series of debt securities, if certain “uniformly applicable” requirements are met, more than 75% of the aggregate principal amount of the outstanding debt securities of all series affected by the proposed modification, taken in the aggregate; or (3) with respect to two or more series of debt securities, more than 66 2/3% of the aggregate principal amount of the outstanding debt securities of all series affected by the proposed modification, taken in the aggregate, and more than 50% of the aggregate principal amount of the outstanding debt securities of each series affected by the proposed modification, taken individually. See “Description of the Bonds—Meetings, Amendments and Waivers—Collective Action.” (front cover) As a result, “Collective Action” and/or “Collective Action Clauses” are mentioned 9 times throughout the Prospectus, including even warningabout CACs as a “Risk Factor”:

The Bonds will contain provisions commonly referred to as “collective action clauses” that permit the Republic to amend the payment terms of the Bonds without the consent of all holders. The Bonds will contain provisions regarding voting on amendments, modifications and waivers which are commonly referred to as “collective action clauses.” Under these provisions, certain key terms of the Bonds may be amended, including the maturity date, interest rate and other payment terms, without your consent. (p.27) But my favorite warning has to be the one about Argentina’s past default history: From time to time, the Republic carries out debt restructuring transactions .... During the past 23 years, the Republic has entered into three restructurings of external and domestic debt in default: the Brady Plan, the 2005 Debt Exchange and the 2010 Debt Exchange. (mentioned twice, p.8 and p.157).

This Argentina “restructuring” would then be the 4th in 23 years, of course – though strictly speaking this is the 3rd attempt to cure the same default from 15 years ago. All told, Argentina has defaulted 8 times since it gained independence in 1816. It’s first default came 11 years after independence and just 3 years after it issued its first debt (Click here to read my report on Argentina’s first default and see the 1858 Bond Prospectus). It took Argentina 30 years to finally “restructure” that first defaulted 1824 bond, with Barings tapping capital markets in 1857 to issue a new bond to pay creditors back. Sound familiar to this week's "restructuring?"

Venezuela Central Bank Quietly Releases Unbelievable 2015 Balances

On Friday, Venezuela’s Central Bank (BCV) quietly released the country’s 2015 Financial Results, informing us further about what the BCV says it has in reserves.

We are lawyers, bankers and geeks here at Latinvest – that is why you are reading about these results from us instead of in the news where this hasn’t been reported yet -- and we joyfully read fine print and deeply delve into Footnotes. But while it released the 2015 Results, the BCV did NOT release the vitally important Footnotes, leaving us wondering what exactly is buried in them that they didn’t want us to see.

The most shocking number is the “Activos Diversos en Divisas” on the assets side of the ledger, which went up $137 billion dollars to $185.2 billion in 2015 (without a corresponding offset on the same debit side, of course)! While the make-up of that $185 billion is hidden in a footnote which we do not have access to yet (we are working on it), we had highlighted in a previous Latinvest Venezuela Report about that segment “Activos Diversos in Divisas” when a new portion was first added in the footnote for the first half of 2015 Results. That addition revealed to us that $2.47 billion of the country’s gold had been mortgaged in the first half of 2015.

Speaking of gold, the BCV’s official 2015 closing figure for Venezuela’s gold reserves is $10.01 billion (“Oro Monetario” under “Activos de Reserva”). Venezuela started 2015 with $14.5 billion in gold, so the country sold and/or mortgaged $4.5 billion in gold from its reserves in 2015. Given what we know and have reported on so far in this year in our earlier Latinvest Venezuela Reports, we believe that Venezuela’s gold holdings have now fallen to under $8 billion.

With the state of Venezuela’s finances and economy in tatters and knowing that Venezuela has now drawn down their Financial Reserves to $13.237 billion (as of March 31) from the $24.122 billion they were last year on March 1, 2015, you have to wonder under what standard of accounting the BCV can claim that their assets went up $186 billion dollars at the same time?