Behind El Salvador’s volcano bonds, Bukele plans to use LaGEO as collateral
The state energy company is at the center of Bukele's Bitcoin plans.
At first, it seemed that Bukele would issue his volcano bonds through the Finance Ministry. But instead of issuing the volcano bonds as sovereign notes, Bukele is ordering the state geothermal company LaGEO to issue the notes. If he acts on this, it will mean that the volcano bonds act more like corporate debt for a state energy company.
LaGEO is the geothermal arm of state energy company CEL. It operates two geothermal energy assets. One is the 95MW Ahuachapan in the west, adjacent to the Guatemalan border. The second is the 105MW Berlín facility in Usulutan. It is this latter asset where Bukele’s government has been mining Bitcoin.
There are a couple of thoughts we have here. First, on the face of this policy, this makes some sense since the point of the volcano bonds is to raise capital for LaGEO’s geothermal infrastructure build-out. In order for the government to build and mine more Bitcoin at Berlín, it needs more well units and generation capacity. Bukele will have a tough time entertaining private miners if he cannot show a plan for increased electricity generation.
But there are some concerns I have as well. LaGEO has a long-term debt-to-equity ratio of 0.26x. If Bukele uses LaGEO’s assets to collateralize a $1bn volcano bond, it means that this ratio increases to 1.55x and if it is indeed oversubscribed as Zelaya claims, the ratio increases to 2.2x. In effect, Bukele is leaving the sovereign debt metrics intact and indebting the state energy company instead. It’s creative accounting.
What we have heard from sources in El Salvador is that LaGEO is cash poor and needed an injection of capital in order to invest in more geothermal wells. LaGEO has struggled to find a strategic partner to accomplish this partly because of the Enel fallout.
Italian utility Enel entered into a partnership with LaGEO in 2002. Enel was a minority partner with 36.2%. In 2008, the company offered to invest $127mn for a 53.25% majority stake in LaGEO. Nicolas Salumé, CEO of LaGEO’s parent company CEL, vetoed the offer. That move ignited a legal battle in which the Salvadoran state demonstrated that it was ultimately an uncooperative partner for geothermal.
The Enel litigation will undoubtedly make prudent investors wary. It will also be a difficult sell for him to tell holders of Salvadoran sovereign debt that he’s going to leverage up without a clear plan to reduce spending while finding more revenue. It will be equally difficult to leverage an energy company with thin revenues.
This is the uphill battle LaGEO faces and the one that perhaps Bukele thinks the Bitcoiners can solve. Geothermal energy is key to El Salvador’s development plans and unlocking the potential has long been a headache. If the volcano bond capital is spent wisely and LaGEO’s investment is managed well, it’s conceivable that the state energy company could start mining Bitcoin and put new revenue on its income statement.
But the risk is that Bukele uses LaGEO to dodge international debt investors’ concerns while simultaneously piling the debt on a failing energy company. The most worrying scenario is that political appointees at the head of CEL and LaGEO mismanage the funds in the same fashion that Hugo Chavez’ government mismanaged state oil company PDVSA and strip mine the company in a circus of embezzlement.
Holders of sovereign debt might keep their heads above water. But retail Bitcoiners holding volcano bonds and holding out for the 5-year returns promised by Bukele’s team will likely feel some serious pain.