When is Default Not Default? PDVSA Reveals

PDVSA owes billions of dollars to service providers, but it is not expected to default on bond debt, so agencies are sticking to their ratings. However, corporate analysts and investors say that bond documentation may allow acceleration following missed payments or successful lawsuits above a certain threshold. PDVSA lawyer Shearman Stearling declines to comment on the legal implications. “The fact that PDVSA has outstanding accounts payable with service providers in and of itself will not result in a rating action,” says Fitch managing director Dan Kastholm. Fitch has PDVSA at B+ (stable). “PDVSA is slowing down payments to suppliers to conserve cash, but this is mostly politically motivated because the company does have the cash to make the payments,” says Tom Coleman, an analyst at Moody’s, which rates the issuer B1 (stable). He adds that the company has been timely with bond payments and he does not expect PDVSA to default, but says suppliers will take notice of non-payment to providers, which Venezuela is nationalizing. At the end of 2008, Barclays estimates total debt with contractors and suppliers reached $13.9bn, compared to $6.2bn in September. US contract drilling company Helmerich & Payne says PDVSA owes it $116m, while oil-service company Williams claims the company owes it about $241m. Kastholm says providers still might have a chance of getting paid. “Payables that are outstanding would likely be incorporated in some form during the negotiation of the valuation of these businesses, which are in the process of being nationalized,” he adds. Barclays believes nonpayment of suppliers by PDVSA is likely to be short term in nature, and it is “extremely unlikely” that this would trigger a default event. S&P rates PDVSA BB minus, negative outlook, and does not return calls seeking comment on the credit. Meanwhile, at the sovereign level, Credit Suisse continues to recommend a 0.5% overweight position in Venezuelan debt and does not think nationalization change