The Corporate Bonds of Petrotrin and the Risks to the T&T Budget
On August 14, 2019 the corporate bond of Petrotrin for USD 850 million is due to be repaid in full. Petrotrin cannot pay this bill of USD 850 million and the Government of T&T has repeatedly stated in public that it cannot pay the sum due on August 14, 2019. If true, then there are two possible alternatives: enter into negotiations with the bond holders to refinance the debt thereby pushing repayment further down the road. Or to default on the debt and suffer the collapse of our credit rating thereby entering the dance hall where Argentina is and simply cannot get out of where we will do the Hotel California tango. But you cannot simply summon the bond holders tell them what you want and they sign on the dotted line and walk away. It does not work so in neoliberal financial markets capitalism as you have to pay your pound of flesh for the favour granted and there is a geopolitical play to it where they can and have brought their political partners in government and in the multilateral lending institutions of the North Atlantic to the negotiations where they are the 800 pound gorillas in the room. And then there are the vulture funds who buy the bonds cheap, cheap from those fleeing the risk of or the default and then sue the entity issuing the bond in a US court winning control over the entity which they then foreclose on and dispose of as they see fit and this process applies to suing the government of the day. Now you understand why Maduro has the masses of Venezuela on the Maduro diet whilst he honours the corporate bonds of PDVSA as they come due without fail. The corporate bond holders of Petrotrin were sending messages to Petrotrin long before the board of the company announced its decision to close the refinery and have since kept sending messages.
Before they were sending the message that the company cannot pay off the bond due in 2019 and the government will have to pay it off for the company. This was reflected in the lowering of the credit rating to BB- and the fall in the price of the bond on the market and the consequent rise in the yield. With the announcement of the board and all that has been aired in the public domain since, the bond price continues to fall and the bond holders are now insisting that refinancing is only possible with a government guarantee of the USD 850 million debt (from 10.3% to 11.9% as at August 30, 2019 to 19.78% at September 16, 2018). The bond market has now therefore indicated its overwhelming suspicion of the feasibility of the board’s turnaround plan for Petrotrin, to be kind, and the feasibility of receiving their bullet payment in 2019. Petrotrin and the government cannot force the bond holders to accept a refinanced bond there must be mutual agreement as Petrotrin agreed to the terms and condition of the contract in return for USD 850 million. At this point in the negotiations the 800 pound gorillas in the room wake up and can now pursue a geopolitical agenda for they have you by the short and curly and we then do the Dragon dance. To guarantee USD 850 million in government external debt we, T&T will add this debt to our external debt stock and guarantee its servicing as the interest and principal come due. And it is highly likely we will have to do the same with the 2022 bond of USD 750 million which means all told some USD 1.6 billion to the T&T external debt stock. The demand for a government guarantee confirms the expressed position that the grand plans announced by the board are not convincing bond holders that a new oil company can in fact generate the necessary cash flow to service the huge debt load the board says will be placed on it to erase the bond of 2019 and be in business to do so in 2022 plus other debt placed on it from Petrotrin. The board chairman should stick to assembling corn flakes. What happens when the 800 pound gorillas in the room now question the fiscal and monetary policies of the government in light of continuing deficit spending and an overvalued TT dollar in light of this added debt load? Remember Mia and Andrew? Then at this point do the Dragon dance!
Sunday Express 16 September 2018 pg. 13 “Govt bond trades at big premium”
October 1, 2018
On 25 September 2018 a report from Moody was published which announced that the rating agency was reviewing the B1 corporate rating and that of its senior unsecured debt of Petrotrin for downgrade. Moody stated that the lack of clarity on the new business profile and strategy announced by the board of Petrotrin in light of the approaching maturity of corporate debt in 2019 and 2022 was the reason for the review to downgrade. The Moody’s statement insisted that Petrotrin is a very small producer of oil and there is nothing forthcoming from the board of Petrotrin that this very small producer comparatively can in fact generate the required cash flow to service its debt load whilst ensuring a sustainable business enterprise exists. Moody has then with this statement voted with its feet on the efficacy of the board of Petrotrin charged with creating this brand new Petrotrin as an investment grade entity.On the 27 September 2018 the Prime Minister stated in a campaign meeting for the internal elections of the PNM that the government of T&T will borrow USD 850 million as government debt to pay off the USD 850 million in corporate debt owed by Petrotrin due in August 2019. There will be no attempt to refinance the debt and place it on the new Petrotrin to service. That bravado has now surrendered to global reality as the message from external is get real. The squeeze is on!