So, this happened. Ricardo Hausmann just teamed up with Mark Walker, a big time international debt lawyer, to push the debate on Venezuelan default, ahem, polite people call it “restructuring” into the nitty gritty. The question, for Hausmann and Walker, is how you put together a strategy to default without being taken to the cleaners by the vultures.

(Spoiler alert: it involves PDVSA declaring bankruptcy.)

Restructuring in the post-Argentina world is made more challenging because the holdouts’ success in that case means that bondholders inclined to negotiate a solution will have to explain to their own investors why they are not pursuing the potentially more lucrative holdout strategy.

Venezuela’s debt is different. About 60% of the country’s public foreign debt consists of bonds, with about half issued by the government and half by PDVSA. With few exceptions, government bonds have CACs, making it somewhat easier to address the holdout problem. PDVSA bonds have all been issued in the US and, as legally required of all corporate bonds, they do not contain CACs.

PDVSA may nonetheless be entitled to bankruptcy protection both in Venezuela and in the US. In this event, PDVSA could obtain a court-mandated standstill order with respect to legal action against it until a restructuring agreement is reached, thereby avoiding a disorderly seizure of assets.

As an additional form of pressure to secure participation, PDVSA’s exclusive right to exploit Venezuela’s hydrocarbon reserves can be withdrawn or modified. (Interestingly, both of these possibilities are highlighted as “risk factors” in the offering documents for PDVSA’s bonds.)

Both PDVSA and the government can also use “exit consents”: changing some of the bonds’ terms – the pari passu clause used by Argentina holdouts, as well as other significant provisions – through agreement with a simple majority of PDVSA bondholders and two-thirds of holders of most government bonds.

Venezuela could further distinguish itself from Argentina by committing to a strong reform program and seeking IMF support. Under the IMF’s exceptional access facility, Venezuela would potentially be eligible for more than $70 billion of new finance to support its reform program. And this backing should help to win strong support from its creditors.

I readily confessed I am way out of my depths here. But it’s certainly a piece you can’t afford not to read.

 

14 COMMENTS

  1. If any of these bonds were acquired by corrupt procedures, or manipulated via insider trading, should these receive the same treatment as “healthy” bonds?

    Personally I think the Assembly should look to hire, preferably pro-bono, or if not perhaps through deferred payment, a firm of international repute to be making due inquiries about whether the debt Venezuela falls under the definition of debt, credit or odious indebtedness.

    At least the Venezuelan National Assembly should notify the international market of its intention to carefully investigate the source of the debt of Venezuela … some of it contracted in times where 100% of the Assembly was pro-government … I say this thinking of caveat emptor.

    And in 2012 in El Universal published an article titled “PDVSA II?” Though in Spanish it has much to do with this article here.

    http://petropolitan.blogspot.com/2012/03/pdvsa-ii.html

  2. I don’t know how much of this is true but a person in Venezuela that have PDVSA2017 bonds went to Banesco to opt-out of the SWAP and he was told that only government banks can handle those request. When he called to the Banco de Venezuela they told them only companies with more than $100,000 in bonds will be allowed to opt-out of the SWAP everyone else will have their bonds SWAPED.

    Can someone confirm if this is true?

    • Hello Fefe. As the swap is a voluntary exchange, no bonds should be “automatically” swapped, regardless of the outstanding amount in bonds they hold. If that person wants to swap PDVSA2017 bonds, it should ultimately contact DF King (the agent in charge of the operation), if they meet the minimum requirements to enter the swap.

      If you need direct information, check this part of the prospectus:

      PDVSA no aceptará ninguna oferta de Canje que resulte en la emisión de Bonos PDVSA
      2020 por una cantidad total menor a U.S.$150.000 para los Tenedores participantes.

      Los Tenedores de los Bonos Existentes pueden contactar al agente de información en Nueva York al: +1 (800) 431-9646 (línea gratuita) o al +1(212)269-5550 (bancos y firmas de brókeres), en Londres: +44 20 7920-9700 o por correo electrónico a pdvsa@dfkingltd.com.

    • Hey! I think you might have mixed up your friend’s story. Only bondholders with more than $150,000 can OPT-IN to the swap =P. It says so in the prospectus:

      “PDVSA no aceptará ninguna oferta de Canje que resulte en la emisión de Bonos PDVSA 2020 por una cantidad total menor a U.S.$150.000 para los Tenedores participantes.”

  3. There should also be some comments from those of us who believe that a default will NEVER happen. As they’ve come this far down the road by cutting back on food and medicine imports with no regrets, why stop now? The Bolivarian Revolution lives! If you’re hungry, …leave. Need medicine, …go to Colombia or something. Exit visas (?), we got em! It’s a pressure valve, simply release it. It’s what the Cubans did, it’s what the Bolivarians will do as well, …nothing. On and on we go.

  4. Lo siento por Hausmann. Pero dudo mucho que eso se vaya a hacer, los bonistas terminarán ganando. Y el país terminará perdiendo, como siempre. sin RR en 2016, todo los cronies van a gozar una bola

    • Perhaps some clarification is in order , professor haussman is not talking about Pdvsa entering bankrupcy proceedings but about it seeking judicial protection from its creditors under a temporary procedure which would stay the hand of its creditors while a reestructuring plan is agreed to. To gain a negotiating advantage vs predatory ‘vulture’creditors he talks of the possbiity of some of the exploitation rights Pdvsa has been granted under Venezuelan law to be transferred to another state company (wiich legally would carry with it the transfer of all assets used in the explitation of the transferred fields) , something which appears viable under Venezuelan Law . The new company would not be subject to attacks from Pdvsa creditors and could probably sell its oil free from the threat of seizures. The idea is bold but not necessarily undoable.

      • The problem with that (transferring of exploitation to another gubmint bound entity) is that the bond holders are in the US. That is where the bonds were issued. So US law makes all of this a moot point. Venezuela politicians and business people can stomp their feet and shake their fists, but, the creditors all but own them.

        If PDVSA were to become a ghost overnight, and the Venezuela gubmint tried to isolate its capital as a form of assumed risk/asset assumption, the gubmint would be required to disperse the remaining holdings to bond holders at some point. the assets were already associated to the bonds that were sold. You can’t undo what was stated.

        There is no way to magically make the assets and debt disappear.

        Regardless of what the Venezuela gubmint tries to hid, international bond holders will force their way into their accounts. Argentina found this out the hard way. And the precedent for this has now been established.

        What I find so comical about this is that PDVSA had to issue bonds in the US as no other country would touch them otherwise. US courts could care less about feelings or socialist goals. And don’t expect China to be any more forgiving.

        The last chapter on this episode is far from have been written.

        • What Mr Haussman sugggests assummes that Pdvsa financial conditions meet the prequisites for it being allowed to seek judicial protection from its creditors until a reestructuring plan is approved that allows it to continue operations and eventually pay what it can of its debts .

          In any event it is to be remembered is that under Venezuelan law Pdvsa owes no oil deposits but simply a govt granted right to exploit them, on certain conditions , where Pdvsa where to become unable to fulfill those conditions ( for example because its become insolvent ) then the government would be entitled to revoke its exploitation rights and transfer them to another company .

          Under Venezuelan law that automatically entails that any assets used in the exploitation of any fields covered by those revoked rights would revert to the Venezuelan govt free of charge which would allow it to transfer them to that other company. US law does not render Venezuelan Law null and void and it would not be easy for US tribunals to contest the application of existing Venezuelan law on Venezuelan soil.

          The new company would not inherit Pdvsa’s financial obligations and would be free to dispose of the oil from such transferred fields without owning anything to Pdvsa s creditors.

          Also to be remembered is that custom is for the property of oil sold to international customers to be transferred to same upon its embarkation at the venezuelan port of embarkation (look up your incoterm standard conditions for FOB and C&F contracts) which means that the oil once on the tanker would belong to its purchaser not to Pdvsa adn thus would not be subject to seizure by Pdvsa ‘s foreign creditors .

          The price for such sale would be subject to seizure if it is deposited in countries which laws allow US tribunals to enforce their decisions on such countrys soil , However not all countries in the world fall into such list….(For example China) , any attempt to seize such moneys would be subject to a long legal procedure in the country in which the money is deposited….

          Not saying that any govt measures as described above would not be contested by Pdvsa creditors but Venezuelan govt and companies would not be entirely toothless in a legal fight with its creditors…!!

          US bond holder would have to fight other creditors (
          Chinese and russian creditors for example) in order to get their seizure orders enforced , there would be a lot of complex legal wrangling involved …….taking up a lot of money and time with results which cannot be guaranteed to be succesfull .

          Mr Haussman is apparently recieving advise from a vereran lawyer on these issues , one thing for sure it never pays to understimate the capacity of debtor countries to put up a fight in protecting of its interests and in this respect the capacity of the legal mind to find arguments and invent manouvers to forestall a creditors legal actions is well neigh endless ….!!

          • Seems to me Hausmann is talking about a quite different scenario: not a disorderly chavista default but a negotiated post-chavista restructuring. We go over the ins and outs in the morning post, btw.

  5. Here comes a partial translation of my “PDVSA II?”

    To avoid confusion let us remember Article 12 of our Constitution: ” Mineral and hydrocarbon deposits of any nature that exist within the territory of the nation, beneath the territorial sea bed, within the exclusive economic zone and on the continental shelf, are the property of the Republic, are of public domain, and therefore inalienable and not transferable”.

    In this regard, unless the Constitution is reformed, something not likely, PDVSA has to do with the business of extracting and selling oil extracted and little, or rather nothing, with the value of the oil not extracted. In addition, suppose PDVSA goes belly up and leaves monstrous unpaid debts behind… Do you think we could not then extract a single barrel and sell it and allocate those funds to import food, medicine we now need more than ever? Unless we are invaded by foreign forces, or there is a closed international blockade to prevent us, of course we could do such a thing.

    Moreover, shortly thereafter we would probably have our PDVSA II, if not necessarily to extract oil, at least to market our extracted oil. Would life become complicated? Of course! Would it not complicate matters if a company like PDVSA was declared a bad debtor? But complications can inspire productivity … and you can see how much PDVSA I lacks that today.

    The actual value of the red-PDVSA I, also in red because of its debt, should not be that high and so we should not expect it to provide us with much income from its liquidation. However, thank God, our oil underground remains, for the moment, valuable and safe.

    What we must take care of though is that the value of our oil underground and sea, does not escape us by means of some unnecessarily onerous extraction contracts. Extraction companies could be sold at very high prices. So let us not forget those creative and sophisticated who offer governments to advance oil income to them, are always on the lookout for thousands of ways to violate the intentions of our Constitution.

    However, what we most need, it is to place the value of our extracted oil at safety from our governments. Bertold Brecht rightly argued: “Pity the country that needs heroes.” I am sure that if Brecht had known our reality he would equally have said: “Pity a country that needs smartasses to seed its oil.”

    The net oil revenues, delivered directly to the citizens, in cash, to the extent that macroeconomic realities of the country so permits, would oil our economy. Today those net oil revenues, delivered in their entirety to the government, only strangle our economy while making a poor and clumsy fiction out of our democracy.

    http://petropolitan.blogspot.com/2012/03/pdvsa-ii.html

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