Venezuela's state oil company is struggling under bond obligations

Venezuela's state-owned oil company has warned that it is in danger of defaulting on its debts after investors declined an offer to swap bonds.

Four times in the last month, Petróleos de Venezuela, S.A. (PDVSA) has extended an offer to investors to swap their bonds which mature next year for notes due in 2020. The oil company is required to pay out $1.8 billion this month and $3 billion next month in debt interest and bond maturities.

This week, it warned investors in a statement that if they declined to swap their bonds, the company may end up defaulting.

"Low oil prices will adversely affect the company's ability to generate cash flow from operations, which will impair the company's ability to make scheduled payments on its existing debt, including the existing notes," PDVSA said in a press release earlier this week.

"If the exchange offers are not successful, it could be difficult for the company to make scheduled payments on its existing debt, including the existing notes, which would result in the Company evaluating all alternative options."

A worker walks past a mural with a PDVSA logo at its gas station in Caracas, Venezuela.
Carlos Garcia Rawlins | Reuters

Many of the problems affecting PDVSA and the wider Venezuelan economy relate to the decline in its oil industry.

"Venezuela's oil sector is struggling due to sharp decline rates in its giant oil fields; less funds available for maintenance, as well as a slowdown in drilling activity as a result of non-payment are accelerating the weakness in oil output," Miswin Mahesh, oil market analyst at Barclays, told CNBC via email.

"Also, given Venezeula's oil is mostly heavy, they need to import light crude (or) diluents to mix with the heavy crude in order to export. And the low liquidity situation and the dollar shortage are making it difficult for them to do this; thereby pressurizing exports as well."

But investors are unwilling to swap their bonds and increase their exposure to the cash-strapped company. According to Russ Dallen, strategic adviser for the Venezuela Opportunity Fund, an exchange traded fund invested in Venezuela and PDVSA bonds, said the company is ignoring how the market views a distressed borrower.

"If you have the larger of the two bonds that Venezuela is trying to swap you out of -- the $4.1 billion of the PDVSA 8.5 percent (due in) 2017 -- you can have half your money back in on November 2 and the other half next year -- or you can take the deal and get half your money back in two years and the other half in four years," he explained to CNBC via email.

"Likewise, if you are in the $3 billion of PDVSA 5.25 percent (due in) April 2017, you can have all your money back in six months or take the deal and have four more years of exposure to a distressed credit."

The Venezuela Opportunity Fund is not taking part in the bond swap deal.

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