Friday, 16 January 2009

PDVSA Falls Behind on Payments to Large Oil Services Companies. We Stick to Our Limited Default Scenario

Dow Jones reported that Venezuela's state-owned oil company has fallen several months behind on payments to oil service companies including Schlumberger Ltd. and Halliburton Co., as well as other suppliers (we heard from authoritative sources last week that some of the latter are rig leasers and fuel components suppliers.) Here is the link to the DJN story. The source of the Dow Jones information is PDVSA head of finance Eudomario Carruyo (yes, the guy in the photo.)

According to executives of the companies affected, PDVSA stopped paying them in August and the debt to all suppliers may have risen by as much as $3 billion, said Dow Jones. One of Market Memorandum sources put those debts at $4.5 billion -- in the nine months through Sept., unsettled accounts with suppliers jumped 39 percent to $7.9 billion, compared with $5.7 billion in the same period of 2007. ''French oil services company Schlumberger and Halliburton are now owed a combined $800 million to $1 billion by some estimates,´´ according to DJN, which added that Carruyo said "the amounts (owed) are important, but manageable.´´

We reiterate that PDVSA will continue delaying payments to suppliers, and perhaps soon will begin reworking joint ventures to build refineries in friendly countries, especially in Latin America. The situation will exacerbate until at least Feb. 15 (the date of the referendum that seeks to eliminate presidential term limits.) A PDVSA's default on bondholders is highly unlikely at the moment.

Citigroup Splits Into Two Companies. Will Other Banks Have the Same Fate?

After reporting a $8.29 billion loss in the fourth quarter, Citigroup Inc. announced plans to break into two different companies, replenish its capital base and end losses once and for all. Vikram Pandit, the under-fire CEO who succeeded Chuck Prince last year, will undo the legacy of legendary dealmaker Sandy Weill. The process includes the creation of Citicorp (which will house the core global bank business,) and Citi Holdings, for the non-core business and the assets guaranteed by the U.S. government.

Reuters says: ''Citigroup, once the champion of the 'financial supermarket´model, is splitting into two operating units in what is known as a 'good bank/bad bank´strategy. Critics of the bank, who argue it had become too big and complex to manage, have demanded a break-up for some time.´´

The question remains. In the current environment where no bank can easily shed assets, how is the new Citicorp going to relinquish of those assets that turned the most problematic for the institution? Are we witnessing a slow agony for a bank that once was the biggest financial services company in the world? Hard to tell, but either bondholders and stockholders are suffering with this. I saw in Reuters that Citigroup's stock rose about 4 percent following the break-up news (it has risen up to 8 percent today.) Well, this might be just a short-term recovery, nothing else. Check the graph below.

Korea Development Bank Pricing Talk (Update)

The sale of $2 billion in five-year bonds by the KDB might be priced to yield 6.75 percentage points above Treasury yields of equivalent maturity. Books likely will be closed shortly.

Issuer: The Korea Development Bank (KDB)
Expected Ratings: Aa3 / A / A+ (Negative/Negative/Negative)
Format: Senior Fixed Rate Global Notes
Maturity: Five Years
Size: $2 Billion (Upped from at Least $500 million)
Price Guidance: Tsy + 675 bps
Managers: BNP Paribas SA / Deutsche Bank AG / HSBC Holdings Plc. / Merrill Lynch & Co. / Royal Bank of Scotland Plc.

Check the COC (change of control) terms 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.

Emerging Market Bond Funds Post Outflows Again ... Is The Recovery Trend Off Again?

According to EFPR, during the week ended Jan. 14, emerging market debt had outflows of $181 million, equivalent to 0.41 percent of assets under management,) offsetting an inflow of $13 million recorded the previous week. We had mention in a posting last week that such inflow had been the first since August.

The greatest outflows were seen for local currency funds, where $137 million were pulled. Currency fluctuations ''had a significant impact on fund asset values, amounting to $388 million over the week while market price effects served to drag asset values down by a further $216 million´´ as the EMBIG spread widened 56 basis points, according to ING Bank analyst David Spegel.

Interesting Article on PDVSA

Check this link if you want to read an alternative view on the problems of PDVSA. Now it seems, according to a report by the NYT, that President Hugo Chavez wants the same Western companies he expelled from the country return to help him extract his oil ... First, as we said, so long as he revamps the industry and the string of regulations he has been imposing on the companies since 2006.

NYT Hints at Rising Risk of Bank Nationalisations in the U.S.

Click here to read a news article in the New York Times about the growing risk of nationalisations in the U.S. financial idustry following news that Bank of America had access to an additional $138 billion in government cash and guarantees. It has access previously another $25 billion (Merrill Lynch included.)

Brazilian Unions Threaten to Strike to Fight Mass Dismissals; We Insist They Will End Up Giving In to Pressure

O Estado de S. Paulo reports today that most trade unions are ready to launch nationwide strikes to fight a wave of dismissals due to the global crisis (click here to read story.) First, let's assume it -- at this point Brazil's on a recession. Second, whereas the position of workers is understandable and admissible, it is not sustainable.

There is a lot of noise and the scheduled meetings risk turning into another round of talks with no specific goals. Or another opportunity to demand a reduction in interest rates and taxes, which at the moment are not a significant problem. The decision by Força Sindical, Brazil's second largest confederation of unions, to walk away from the negotiations handed a setback for the business sector proposal of cutting salaries and work time to fend off dismissals.

President Luiz Inacio Lula da Silva and his ministers have little time to convince unions that it might be better to ask their affiliates to renounce to some of their rights temporarily in this struggle to preserve jobs. But a good signal to investors in general is that the recession is offering an opportunity to ease the old-fashioned labour legislation the nation has.

Earlybird, Jan. 16, 2008

Headlines for Thursday, Jan. 16:

U.S. -- Bank of America Gets $138 Billion in Government Aid (Bloomberg): Well, this news made me wake up soooo early!!!! The acquisition of Merrill is backfiring. In the face of disappointing banking numbers expected for the last quarter, BofA's numbers will tell us more about its plans to abandon the takeover. A previous Bloomberg story on the matter said regulators insisted the ''Merrill deal proceed because its collapse would renew turmoil in the financial system,´´ according to remarks made by anonymous sources.

U.S. -- More Government Aid Underway (Reuters): Lawmakers will probably get their act together and before Friday they will have ready approved the disbursement of the second tranche of the TARP -- just hours before Barack Obama's inauguration.

BRAZIL -- The Dream is Over: Lula Acknowledges That 600,000 People Lost Their Jobs in December (Estado): Well, President Lula might now be taking more seriously the proposal by Vale CEO Agnelli. Unfortunately, one setback occurred yesterday: Força Sindical, the union that has more than 7 million affiliates, suspended negotiations with the São Paulo State's Federation of Industrialists (the most powerful industry lobby.) Força is the only union in the country that seems to understand the gravity of the situation and would be ready to put the interest common (cutting worker benefits and reducing work hours) before class vested interests. There's no free lunch, but ... attitudes such as Força's are very much needed at this moment.

BRAZIL -- Companies' Clout Grows, May Win Lower Wage Benefits (Estado): That's my view. Estado doesn't say it -- I do. unions will be convinced by Lula (yes!) to back off from their stubbornness and renounce to some of those prerogatives at least temporarily. Brazil wins if that chronic labour regime is dismantled, at least for a while. This is the news story of the year -- it has political, economic and financial implications of great extent.

COLOMBIA -- Marulanda Testament Revealed; Acnowledges Negative Impact of Army Victories on FARC (Cambio): The old Pedro Antonio Marin, ''Sureshot´´ or ''Tirofijo,´´ warned his successors that it will take years to restore the name of the FARC in international circles. And that poor Chavez, Correa and Evo Morales will be victimised for their open support to terrorism in Colombia.

PERU -- Drop in Remittances to Hurt Middle Class (Comercio): It's funny that remittances rose just after the crisis blew out -- to me it was the temporary effect of the rise in the dollar. But now that millions of jobs are being destroyed in the U.S, and other developed economies (like Spain), there is no reason for family transfers to remain unchanged or rise.

VENEZUELA -- Car Sales Dropped 45 Percent Last Year (Universal): Well, the crisis is afflicting Venezuelans, who not long ago had to wait more than a year to be shipped a new car.

Ecuador: It Seems That The Default Was The First Step Towards Shunning the Dollar

According to Dinero, central bank officials and economic team policy-makers are mulling changes to the monetary control act (click on the link to read the act.) This comes as the country is still gauging what bonds it will stop payments on and how it renegotiates more favourable terms with creditors.

One Wall Street analyst told us last month that the $3.5 billion bond default was the first step towards getting rid of the dollar as Ecuador's national currency. While officials say that the move will take months, it will only take a few hours for the new currency to plunge if it is implemented.

Read the story and see how contradictory are the remarks of these officials.

Banco Central retoma función de emisor

Publicado el 15/Enero/2009

Asesores del Gobierno y autoridades del Banco Central del Ecuador (BCE) analizarán un proyecto de reforma a la Ley Orgánica de Régimen Monetario. Este da cabida a la creación de una moneda de libre circulación paralela al dólar en un plazo de tres años, según señala el borrador del documento al cual tuvo acceso DINERO.Luis Rosero, miembro del directorio del BCE, confirmó la existencia de este documento y dijo
que en este momento el proyecto está siendo analizado y modificado por los miembros del Directorio del BCE. "Este borrador no refleja nuestro criterio. Una vez que se definan los cambios se enviará al Ejecutivo y posteriormente a la Comisión Legislativa para que esta sea aprobada o denegada", señaló Rosero. Según el
artículo séptimo del borrador del proyecto, "el Banco Central podrá emitir especies monetarias en los términos que establezca su Directorio, en ejecución de la política monetaria".

Para Patricio Almeida, analista económico, si este modelo se aprueba, debe responder
a intereses nacionales estableciendo claras políticas monetarias. "Para este paso, el Gobierno debe poner candados que eviten que el dinero se lo emplee únicamente para cubrir el gasto público", señaló.Una fuente de la Presidencia aseguró que Correa va a empezar este cambio con una reestructuración institucional, "con el fin de reunir a los mejores técnicos para que puedan manejar el nuevo sistema bimonetarismo".Rosero explicó que este es un cambio que también se está estudiando y "se lo conocerá oficialmente cuando el presidente lo disponga".Otro punto del documento legal indica que: "El BCE cambiará al portador y a la vista,
sin cargo de ninguna naturaleza, las especies monetarias de curso legal, de cualquier clase o denominación que se le presenten al canje, por billetes o monedas de denominaciones que se soliciten...".No obstante, Almeida recalcó que para que el país llegue hacer estas modificaciones, "el Régimen tendrá que
generar un ambiente de confianza para que los ciudadanos confíen en que no van a perder su dinero... pero esto tomará tiempo".

Por su parte, Alfredo Vergara, ex superintendente de Bancos, indicó que este es el primer paso para encaminar la desdolarización, pero advirtió la gravedad del asunto. "La nueva moneda se devaluaría un 400% a los pocos meses debido a la dificultad en la adaptación", dijo.Almeida sostuvo que más viable es que se concrete la idea de crear un banco a escala regional, que pueda sustentar la economía de los países
latinoamericanos."Solo con la unión de la Argentina y el Brasil se puede lograr la creación de una moneda en común y dejar de depender de la divisa estadounidense, antes de que la crisis nos saque de ella",

La posibilidad de dejar la dolarización es un tema que se ha mantenido en el debate durante los dos años de mandato del presidente Rafael Correa.Incluso, analistas y empresarios señalaron que aunque el Gobierno afirme que no entrará en este proceso, la crisis internacional, las medidas económicas internas y el excesivo gasto fiscal "nos llevarán a una salida forzosa".