Published On: Fri, Feb 3rd, 2017

PdVSA default ready to ‘Make Venezuela worse again’

MaduroCARACAS - Nicholas Maduro is about to make Venezuela worse again.  According to Fitch Ratings, Venezuela's oil firm, and the Socialist Party of Venezuela's (PSUV) only viable printing press, is on the cusp of default.

Fitch said on Tuesday that PdVSA faces a challenging 2017, regardless of oil prices. PdVSA is producing less oil than it has in years, has a weak cash position, and has a lot of debts due that it cannot pay on its own. Default is probably this year.

If so, PdVSA bond prices face an average recovery rate of 31% to 50% of their value.

"Actual recovery outcomes will likely be at the lower end of the range due to the willingness of the Venezuelan government to extend concessions to investors," Lucas Aristizabal, Senior

Director for Fitch said in a statement today. "Should oil prices remain around current levels, an average recovery may lead to additional future defaults to further reduce obligations and allow for necessary transfers to the government."

In theory, PSUV leadership would not want PdVSA to default because it would risk turning off the spigot of dollar bills.  The government uses PdVSA revenue to fund social welfare programs. Such a move would also bring up the worst case scenario for the country; one that makes Caracas the new Havana and closes its doors to much of the world. As it is, Venezuela is facing a massive brain drain with migrants leaving to Colombia, northern Brazil and into the United States. Venezuela under Maduro has become the failed state of Latin America. A default would be he icing on the cake.

PdVSA's gross earnings after royalties and social expenditures fell to approximately $13 million as of year-end 2015 due. Fitch calculates that EBITDA after royalties and social expenditures for the last 12 months ending in June 2016 was actually negative. The recent increase in oil prices might have helped.

Debt as of December 2016 was $41 billion, down from $43.7 billion in 2015. In 2015, PdVSA's adjusted leverage was more than 90 times, compared with leverage below 2.5 times over the previous years.

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