In related multiparty transactions currently under discussion, US bank Goldman Sachs would buy the Dominican Republic´s $4bn debt that it owes Venezuela´s state-owned oil company PdV for $1.7bn, and likely issue a corresponding bond at an annual rate of up to 11pc, according to executives and officials close to the negotiations.
The Dominican Republic, one of the main beneficiaries of Venezuela´s PetroCaribe regional oil supply program, has accumulated debt of about $7bn plus over $4bn of PetroCaribe debt, totaling $11bn or roughly 200pc of the country´s GDP.
By selling the $4bn in obligations to Goldman Sachs, the Dominican Republic improves its overall debt profile and brings down yields on its total bond debt, lowering interest costs.
PdV gets $1.7bn in cash now and removes $4bn of Dominican Republic PetroCaribe debt it likely never would have collected fully anyway.
The transaction would improve PdV's cash balance. Still, it would not put more than a dent in PdV's overall financial debt, which is now about $50bn, not including debts owed to contractors and suppliers, joint venture partners and pending compensation awards associated with international arbitration.
Goldman Sachs is also discussing the possible discounted purchase of Jamaica's $3bn in PetroCaribe debt to Venezuela.
PdV and Goldman Sachs declined to comment.
The potential transfer of the debt obligations illustrates the dire state of Venezuela´s oil-based economy.
PetroCaribe, founded in 2005, allows member countries to buy Venezuelan crude and oil products on preferential terms, including barter arrangements.
Under the program, PdV supplies a total of around 200,000 b/d of crude and refined products to member countries. Around half of this goes to close ally Cuba, which has separate bilateral arrangements with Caracas.
Despite the program´s soft commercial conditions, member countries have accumulated debts to Caracas that totaled nearly $14.5bn at the end of August. The Dominican Republic, Jamaica and Nicaragua accounted for roughly a combined $10bn or almost 79pc of the total.
PdV´s negotiations with Goldman Sachs to sell about half of its PetroCaribe debt portfolio at a substantial discount reflect its critical cash flow deficit resulting from a steep decline in the value of its oil exports.
Venezuela´s economy is expected to contract by around 4.5pc in 2014, and 70pc annual inflation could balloon to more than 100pc next year.
The average price of PdV's oil exports has plummeted to around $63/bl from a monthly average of $99.11/bl in June.
PetroCaribe members are allowed to finance up to 50pc of the oil shipments received from PdV for up to 25 years at annual interest of 1-2pc.
PetroCaribe members can also pay their oil-related debt in non-oil goods like agricultural products. PdV to date has received over $3bn of payments in mostly agricultural products, energy ministry figures show.
Audits commissioned by the energy ministry show that the price values attached to these agricultural goods tend to be up to 100pc greater than open market prices for comparable goods.
PdV is accelerating its efforts on several fronts to generate more cash quickly, the energy ministry said.
"Venezuela's government is having a fire sale on oil and other assets. Anything that isn't nailed down is fair game," a US bond trader with direct knowledge of PdV's plans tells Argus.
PdV has been trying to sell its US downstream subsidiary Citgo and other overseas assets, and Caracas is looking for more loans from China.
Venezuelan President Nicolas Maduro today ordered an immediate 20pc reduction in government spending.
The Venezuelan central bank estimates that every $1/bl decline in PdV's average export price reduces annual hard currency revenues by $620mn.
PdV generates over 95pc of Venezuela's annual hard currency revenues.
The central bank estimates that the government needs a minimum annual oil price of $80/bl to cover its $177bn budget needs in 2015 without borrowing locally, and at least $117/bl to supply the country's hard currency needs including debt servicing and imports.
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