The power of lenders: Venezuela-Japan edition

Ever wonder how things work? Here’s how things work.

April 7, 2009: Venezuelan President Hugo Chavez says Japanese funders will lend state oil company PDVSA $1.5 billion for refinery improvements.

May 21, 2009: Venezuela President Hugo Chavez announces upcoming nationalization of all hot-briquetted iron plants in his country. This includes Comsigua, a 1.3 million-ton a year mill majority-owned by a group of Japanese companies.

June 23, 2009: Japanese government threatens not to guarantee the refinery loans. That would kill the loans. The two big concerns were that Japanese assets had been nationalized without any discussion of payment for their shares, and that Japanese suppliers to PDVSA were awaiting payment on long-overdue invoices.

Two years go by with the iron mill in decline. A Kobe Steel securities filing shows that the company lost money in 2008 and 2009, and that sales fell by half from the boom year of 2008 to 2010. At some point in late 2009, I checked with sources and found that the Venezuelan government hadn’t scheduled any meetings to discuss terms for buying Comsigua, even though the Japanese companies were eager to sell their shares in the now money-losing company.

June 25, 2011: Venezuela “acquired 73.3% of the outstanding shares of Complejo Siderúrgico de Guayana, C.A (Comsigua)…from several Japanese shareholders including Kobe Steel K.K. The purchase price for these shares was US$232.9 million, composed of a US$78 million down payment and ten semiannual installments of US$15.4 million each.”

June 28, 2011: Japan commits to the $1.5 billion loan.

Venezuela has a strict policy of paying book value for nationalized assets. The book value of Comsigua at the end of 2008 was $140.3 million, according to that Kobe Steel filing. So the book value of the shares that Venezuela purchased was $102.9 million. The Japanese shareholders got $232.9 million, or almost 2.3 times book value. Will ExxonMobil and ConocoPhillips get such generous settlements? How much depends on US government leverage?

6 thoughts on “The power of lenders: Venezuela-Japan edition

  1. westslope

    otto: What is it about being honest, straightforward and showing some integrity in business deals that some Latinos just don’t get?

  2. westslope

    The loan will be repaid at the Libor rate plus 3.8%. I assume that THE Libor rate is the annual one 0.90%. Right now, the loan cost is 4.7%.

    That is very inexpensive for a regime that has time and time again demonstrated little respect for the security of property rights. At face value, it fails to compensate for risk. So what are the Japanese thinking? That Venezuela will reimburse in oil at rates below world oil prices?

    Is this more sunk-cost strategy at work? Have Japanese political sociologists forecasted a radical regime change?

    More questions. Are these refinery expansions designed primarily for the export market? If Venezuela was managed like Norway, would it require outside funding to expand refineries?

  3. aschachh

    January 29, 2009: Pedro Suarez and Jose Marcano killed by police at the gates of the MMC plant in Barcelona, Anzoategui.

    May 5, 2009: assassination of Argenis Vazquez, secretary of the Toyota workers’ union, in Los Chaimas de Cumana, Sucre.

    Otto’s right, of course, that some gringos don’t get how stuff works in Venezuela. But let’s not be assholes about the reality of the situation.

  4. westslope

    More than a few gringos “get it” with respect to doing business in Venezuela. That does not necessarily or readily translate into an attractive rate of return. Note the continued absence of broad interest on the part of the oil&gas sector and foreign capital.

    Do the Japanese get it? Is getting paid err compensated more per book value an economic victory or an instant snap-shot accounting victory? Is this really a quote unquote ‘generous settlement’ by western business standards?

    Maybe the Japanese would have been better off buying a sports team or a (another) west coast fishing lodge or some other type of vanity investment?

  5. moctavio

    Oh, to be Japanese and all! Just think, Venezuela paid US$ 232 million in compensation for Comsigua’s 1.3 million a year production levels. Sivensa, with a market cap of 50 million or so, had capacity of 3 million Tons between Orinoco Iron and HIB, that should make it a half a billion dollar compensation for Sivensa shareholders, except that they are Venezuelan, not Japanese.

    Pity.

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