Most of the bonds issued in the international capital markets by the Republic of Venezuela and its state-owned oil company, Petróleos de Venezuela, S.A. (“PDVSA”), have now fallen into default. Although President Nicolás Maduro of Venezuela announced last fall that the bonds would soon be restructured or refinanced, no attempt has been made to pursue such a restructuring. Indeed, a conventional sovereign debt restructuring may not be possible for Venezuela in light of the sanctions imposed in August of 2017 by the U.S. Government and administered by the U.S. Office of Foreign Assets Control (“OFAC”). As currently drafted, those sanctions will prevent U.S. holders of Venezuelan bonds from participating in a debt restructuring.
One of two things must therefore happen if Venezuelan debt is to be restructured. Either the Maduro administration must alter its style of governing to such an extent that OFAC sanctions are lifted, or the Maduro administration must leave the political stage and be replaced by a new administration that enjoys international, particularly United States’, support. Even if this happens, however, a restructuring of Venezuela’s public sector debt will not be easy.
Venezuela derives 95% of its foreign currency earnings from the sale of oil, much of it to the United States. Not since Mexico in the 1980s has an emerging market country with this level of commercial contacts with the United States attempted to restructure its New York law-governed sovereign debt. Holdout creditors in a restructuring of Venezuelan sovereign debt will therefore present a serious, potentially a debilitating, legal risk. The prime directive for the architects of a restructuring of Venezuelan debt will be to neutralize this risk.
Most, but not all, of the bonds issued by the Republic of Venezuela contain collective action clauses (“CACs”) that permit a supermajority of the holders of the instruments to agree a restructuring in a manner that binds all holders. PDVSA bonds do not contain CACs. That said, there are unusual features of the PDVSA bond documentation that may facilitate a restructuring of those instruments.
The first remarkable feature is a clause in the PDVSA indentures that explicitly permits, with the approval of a majority of the creditors, a change of the obligor on the bonds. And the second is an exception to the Negative Pledge clause in the PDVSA bonds and in PDVSA’s Promissory Notes (many of which were issued to service providers who did work for PDVSA over the past few years) that allows PDVSA to pledge its assets to the Republic, in exchange for appropriate compensation. In two articles, “How to Restructure Venezuelan Debt” and “Deterring Holdout Creditors in a Restructuring of PDVSA Bonds and Promissory Notes”, we describe how each of these features would separately allow the Venezuelan government to effectively deal with the threat of holdout creditors in some future restructuring.
Effectively dealing with, and constraining, holdout creditors is a crucial element of any sovereign debt restructuring, particularly in light of the enormous recoveries that many holdouts recently received from Argentina a little over a year ago. That said, it is by no means the only task that needs to be performed before a restructuring can go forward. Other tasks include performing a credible evaluation of Venezuela’s financial capacity and persuading creditors that a sensible fiscal plan for the future has been put in place and that the government will stick to it. Neither one of those tasks, we think, could be plausibly performed under the current administration in power in Venezuela. Once the current regime departs and a sensible one takes charge, however, things will need to move quickly on the debt restructuring front.