Thursday, 15 January 2009

Another Setback for PDVSA: Refinery Fire Halts Operations. Why Does This Company Have Continuing Facility Accidents?

Reuters reported last night (click here to read the original story) that the flexi-coke unit of Amuay refinery, Venezuela's largest, reduced its input as a result of a fire and defective operations. Last August, PDVSA had to disable the same unit at Amuay for maintenance, according to Reuters. the unit had resumed operations in December.

The question that many readers are asking themselves is, Why is this happening to a country that raised $200 billion from oil sales in the past three or four years? The answer lies on the fact that, because of President Hugo Chavez's ideological and geopolitical agenda, the state oil company has had to spend twice as much on social programs than on its oil and natural-gas business. The first time such an business focus ''imbalance´´ took place, in 2006, it signaled to Venezuelan watchers that PDVSA was braced for growing challenges in the years ahead.

Well, those ''challenges´´ have turned into ''real problems.´´ We insist again that PDVSA bondholders must remain attentive to these type of developments. In the face of OPEC-mandated output cuts (the Venezuelan company has already implemented a reduction of 166,000 barrels per day of a total of 190,000,) 17 Chinese-made oil drills were stopped and some unions said that 5,000 workers were fired. the company denies it. certainly, there are increasing rumours about the health of PDVSA operations, and whether the company is able or well prepared to face a dearth of funding for the coming months.

  • First, our sources don't expect a default on bondholders, but cash problems will be frequent. The company has been denied access to funds in international markets -- and conditions for refinancing of about $5 billion in loans may get tougher.

  • In April PDVSA has to pay interest on $7.5 billion of bonds. Around the same month the company has to pay taxes to the central government (tax expenses rose more than 90 percent in the first nine months of 2008.)

  • PDVSA says in its Sept. financial report that the company has trimmed debt by over $1 billion by carrying out a series of debt renegotiationa agreements. We wonder how they managed to do that if, when markets were liquid and almost anyone had access to wholesale lending, BNP Paribas SA and partners decided to charge PDVSA a higher interest rate for $1.125 billion in loans because of ''political uncertainty´´?

  • Check the following table with PDVSA's maturities calendar between 2009 and 2013. The calendar is heavy for this year

We Hear Insistent Rumours Over the Acquisition of BicBanco by Bradesco. Takeover War in Brazil Banking Sector Far From Over!

We hear that BicBanco, a mid-sized bank specialised in consumer and middle-market lending, is up 14 percent in São Paulo on speculation it is a takeover target by Banco Bradesco SA. The day the Votorantim deal was announced, this blog said possible transactions would include a BicBanco purchase (click here to see that I am not lying.)

BicBanco peers such as Banco Cruzeiro do Sul, which allegedly went through funding problems amidst the crisis in October, or ParanaBanco, whose incursion into paycheck-deductible lending has been quite successful, may also be targets of takeovers. Because funding dried up in the wake of the credit crisis, some of these institutions ran short of gas to continue expanding (gas = borrowing as opposed to own capital resources.) Some of them have begun to sell their loan portfolios to bigger rivals and are giving up growing. Consolidation is the name of the banking game in Brazil these days.

Meirelles Surprising Remarks Increase Odds of Interest-Rate Cut

A plan outlined last night by Banco Central Brasil President Henrique Meirelles to ready $20 billion in funds to help local companies refinance maturing debt overseas indicates that corporate liquidity problems will probably persist for another quarter or two. Meirelles, the former Bank Boston executive, reaffirmed a commitment made in November that the government will use any sources of money at hand (even international reserves) to help about 4,000 companies roll over maturing obligations. Brazil had $205 billion in reserves at the start of this year.

We discussed in this a few days ago the problems facing Arantes, Cosan and other commodity, food and cellulose producers. Access to credit will normalise in a few months, but the problem is time and availability of funds. According to ING Bank, Brazilian companies face more than $60 billion in bond and loan maturities throughout the year. Trade loans were cut off at the height of the crisis in early October -- the central bank had to intervene and commit more than $9 billion in reserves money for that purpose.

If there is a consequence to this announcement -- apart from the sigh of relief that some corporate managers might have made following Meirelles remarks, -- is that the BCB will engage with a more aggressive interest rate-cut than initially planned for next week. My bet is a 75 basis-point cut, what is yours? Write us a comment and let us know.

A reader wanted to know my line of thought regarding the cut. Here is my answer:
  1. ''The experience of Brazil during the 2002 crisis is valid for the time being. When Brazil had this speculative attack ahead of the 2002 election (you probably remember that the currency dropped 50 percent in three months) the issue of trade financing and credit problems couldn´t be dealt with properly becasue international reserves were falling dramatically and the economy was undergoing a hike in inflation.´´
  2. ''The bank raised the Selic by 300 bps on Oct. 14 (forgive if I am wrong, using my memory here) and kept borrowing costs high for a few months until price pressures subsided. Trade lines remained shuttered for as many as seven months, until markets realised the Lula administration was willing to honour the national debt. The situation here is the opposite, except for the credit crunch. Inflation is down dramatically -- and it will keep falling, -- and the government is quite concerned with jobs and activity in certain key industries (commodities, foods, mining and energy.) The country has plenty of reserves at this moment, and Brazil didn´t suffer the currency tumble that other EM nations (especially EE countries) did. Reserves are at similar levels to those before the crisis!!!´´
  3. ''Having said that, the same way Arminio Fraga´s BCB overreacted by raising the Selic by 300 bps in an extraordinary meeting in a mid-October afternoon, Henrique Meirelles´s BCB will be a bit more measured, to show market participants his board is both agressive and prudent. People in the markets expect a half-point cut, but at this juncture I think that 75 bps is the most likely size. It´s a balanced cut (big for Brazilian standards, although small if you see the gravity of the crisis that is coming.)´´

Bond Alert: Korea Development Bank Offers Benchmark Size Issue (Update)

This came out a few minutes ago while I was cooking pasta:

Issuer: The Korea Development Bank (KDB)
Expected Ratings: Aa3 / A / A+ (Negative/Negative/Negative)
Format: Senior Fixed Rate SEC Reg'd Global Notes
Maturity: Five Years
Size: Benchmark Issue in U.S. Dollars (At Least $500 Million)
Price Guidance: N.A.
Managers: BNP Paribas SA / Deutsche Bank AG / HSBC Holdings Plc. / Merrill Lynch & Co. / Royal Bank of Scotland Plc.

Check the terms for COC (change of control) for this issue -- in the event of any decrease in the Korean government´s stake and a deterioration in ratings, there will be a 100 percent put. The old times are gone -- tougher conditions are on the table even for borrowers with good credit quality.

But the truth is, a source told us, that there are concerns regarding the possible sale of KDB. The source tell us that the problem is that the proceeds from any sale aren't used to prop up capital but funneled toward other purposes. South Korea had announce plans to sell the bank last year but the credit crisis and a political standoff have both put it at a standstill.

Brazil Labour Costs Rise, Casting Doubts Over Effectiveness of Policies to Ensure Job Stability

Cia. Vale do Rio Doce CEO Roger Agnelli was right: a month ago it was about time to start discussing a flexibilisation of Brazilian labour laws. As the downturn takes the shape of recession, and Finance Minister Mr. Criswell's anti-cyclical policies prove themselves ineffective to reverse the course of the slowdown, Agnelli's proposal only gets more valid.

Labour costs per unit rose 11 percent in November (click on the link to read the official report.) The number, unexpected by most analysts as reported by newspaper Valor Econômico, reflects the rapid and drastic decline in output per unit. Dismissals should have followed the decline in production, but in Brazil firing someone is expensive and often impossible or unfeasible. This number points to a wave of dismissals in the coming months, since companies will be able to meet falling orders with a reduced headcount. The statistics agency showed that those sectors with smaller labour costs per unit were exactly those that fired staff as the crisis unfolded. Cellulose (affected by the derivatives scandal,) leather and shoes, machinery and transport equipment, just to mention a few. Productivity dropped 6 percent in November on a year-on-year basis.

Easy: more dismissals will come this quarter. And no matter how the government cry-babies at it, or how many new measures it implements, or how much from the budget is spent, there are things that are unavoidable during a crisis. Dismissals are an unfortunate way by which companies adjust their cost structure to dribble the impact of a challenging environment. I hope I am wrong, but the Lula administration is the type of government that uses retaliation to force an outcome. I fear for measures that curtail lending to companies just because they are firing people. Are there risks that this can happen? I bet yes.

RBC Predicts Another Sell-off of Emerging Market Assets

Royal Bank of Canada analysts are little confident on the prospects for the Chinese economy and, therefore, the rest of emerging markets economies. Without giving the specific timing range, the shop says that capital flight from foreigners liquidating Chinese bond and stock holdings and the unwinding of the on and off-shore long yuan carry trade will be troublesome for the world´s fourth largest economy. Regarding other emerging markets, RBC's pessimistic view on emerging market flows this year expects $50 billion and $100 billion worth of outflows, suggesting ''we are in the eye of the storm with a second more emerging markets-centric sell-off awaiting.´´

RBC's view goes in the opposite direction to many other banks that are now signaling a mild revival of risk-taking and demand for emerging market debt. In recent days, flows into emerging market bond funds have returned into the black for the first time since August. One hedge fund manager in Chicago tells us that investors will return to their wait-and-see approach after the inauguration of U.S. President-elect Barack Obama. What is evident is that the rapid deterioration of economic data across Latin America will help deter many investors from flocking into the region's bonds and stocks in the short run.