Just yesterday, Ricardo Hausmann and Mark Walker published a piece in Project Syndicate, on how Venezuela and PDVSA should deal with a debt default in the post-Argentina world. The piece is sure to cause as stir, as it moves the debate about Venezuelan debt restructuring down from the Olympian heights of economic philosophy and into the legal trenches of the how-exactly-do-we-do-this.

There are a lot of questions about the scenario Hausmann and Walker set out, and we’re here to try to walk you through some of the intricacies.

Exit Strategy

The Hausmann Way hinges critically on a bit of bond prospectus boilerplate that’s obscure even to people who follow these things: invoking “exit consent clauses” in the context of debt restructuring.

It works like this: if a majority of bondholders apply “exit consents” set out in the prospectus of the bonds they’re getting out of, they’re legally able to amend some of the bond’s terms. In effect, they’re able to amend the bonds they’re dumping to make them less attractive to potential “vulture funds” or holdouts planning to sue the Republic or PDVSA to force a full cash payment.

The idea is to change the conditions of the old bonds to make them unattractive. Like tattooing your ex’s forehead so she won’t be desired by anyone else.

Sounds easy enough, right? Well, there are some major caveats.

First, you need to arrange a debt restructuring that a sufficient majority of bondholders will go for: two thirds in the case of sovereign bonds and more than half in PDVSA bonds. Those negotiations are never easy.


Turns out the pari passu clause is precisely the type of non-payment term clause you can amend with an Exit Consent Clause.

Second, you need to pick out the points in the bond prospectus (the contract) that you can change to render the bond toxic for holdout creditors. This isn’t as straightforward as just “amending” the bond’s face value down to zero: Exit Consent clauses can’t be applied to payment terms like the payment date, the face amount of the bond, the currency the bond is denominated in or the majority threshold to vote on substantive matters. All you can amend is the nuances of non-payment terms.

That sounds pretty bad, until you have the ah-ha! moment Ricardo Hausmann had at some point these last few weeks over coffee with Mark Walker: turns out the pari passu clause is precisely the type of non-payment term clause you can amend with an Exit Consent Clause.

This is a big deal. Pari passu — the principle that you have to pay off all bondholders on an equal footing, without cherry picking favorites — was the clause at the center of Argentina’s troubles. The way tribunals have interpreted it after the Argentine default, pari passu became a deal-breaker to any attempt at a negotiated debt restructuring. In Argentina’s case, courts actually blocked the country’s attempts to pay off the bonds of holders who had accepted a restructuring deal if the Republic didn’t also simultaneously payoff the holdouts at the old, higher rate.

Of course, with that precedent around, no holder will ever agree to a restructuring again: there’s zero incentive to, if you can demand full payment just for refusing to sign a piece of paper.

Venezuela’s has three bonds series with pari passu clauses very similar to the ones that put Argentina through restructuring hell for two decades. Those bonds are also the same ones that lack Collective Action Clauses – meaning a majority of bondholders can’t force a minority to restructure. The gory details are here.


PDVSA can’t even convince bondholders to accept $1.22 in new bonds for every $1.00 in old bonds it had: how are we supposed to convince creditors to accept $0.80 on the dollar?

The strategy Hausmann and Walker set out would be controversial, and the road to implementation is full of hazards. To note just one pitfall, public-sector bondholders holding sovereign or PDVSA bonds are not normally entitled to vote as regular bondholders on these issues. But we know Venezuelan state and parastate bodies have been buying up bonds left and right, which will complicate claims to have gotten to the appropriate thresholds to invoke an Exit Consent clause.

And there’s the ever-so-dicey proposition of getting creditors to accept restructuring in the first place, which is never easy since restructuring is really a euphemism for partial, orderly default. PDVSA can’t even convince bondholders to accept $1.22 in new bonds for every $1.00 in old bonds it had: how are we supposed to convince creditors to accept $0.80 on the dollar?

Luckily for Venezuelan sovereign bonds, out of 15 outstanding bonds series, only three have old fashioned pari passu terms and lack Collective Action Clauses (CAC). The bad news is that two of those three bonds series are due relatively soon in 2018, and that they’re the favorite pick of potential vultures.

What about PDVSA?

PDVSA’s case as a corporation is different. Since they’re technically corporate bonds rather than sovereigns, there are no CACs on them. Given that PDVSA’s assets are attractive to bondholders, it can be more difficult to negotiate a restructuring and exit consent amendments. There’s just too much meat left on that carcass for it to be easy to scare the vultures away.


The toxic overtones of the word aside, bankruptcy protection could make a lot of sense for PDVSA.

But Hausmann & Walker have a solution: PDVSA can just declare bankruptcy. That would be one hell of a cadena. The key here isn’t the bankruptcy, though, it’s the bankruptcy protection. After declaring bankruptcy, a company’s assets can’t be picked over by creditors willy-nilly: a judge can shield those assets while he imposes an orderly framework for repayment. The toxic overtones of the word aside, bankruptcy protection could make a lot of sense for PDVSA.

There are two ways PDVSA can do this.

First, PDVSA would have to file a debt moratorium in Venezuela (under local law) and then, file for bankruptcy in the US under Chapter 15 of the US Bankruptcy Code.

This allows PDVSA to seek recognition of a foreign bankruptcy proceeding in a US bankruptcy court. If the court grants it and recognizes the Venezuelan moratorium procedure, that would stop any litigation from bondholders against the debtor (PDVSA) in the US. Sounds crazy, I know, but Brazilian companies have been able to pull this off in the recent past.

But it’s risky. There’s no guarantee the U.S. court would recognize PDVSA’s Venezuelan moratorium. In addition, it’s likely that CITGO would have to file bankruptcy too: it’s a PDVSA subsidiary, and to declare PDVSA bankrupt without having CITGO follow suit would be to invite bondholders to train their fire there.

As a U.S. company, CITGO would have to file under a different part of the U.S. Bankruptcy code: the famous Chapter 11. This would make it easier to hold off creditors seeking to attach CITGO assets, and would open the door to obtaining financing while under bankruptcy. Not that that’s likely, given PDVSA’s current condition.

Again there are risks: if implemented badly, the longer the company fails to restructure its debt, the longer it remains in bankruptcy. This is why some Latin American companies have used chapter 11 as a part of a “pre-packaged” debt restructuring: the debtor presents a bankruptcy and reorganization plan to bondholders before actually filing it, in order to secure enough votes in favor of it once it’s implemented. Pre-packaging can save a lot of time.

But it all comes down to the company’s willingness to make some concessions to bondholders to get them to agree to the plan. Things like a lower “haircut” on the debt exchange, cash distributions to bondholders, or even as Hausmann suggests, to modify or withdraw “PDVSA’s exclusive right to exploit Venezuela’s hydrocarbon reserves”. So, another crazy cadena in the works there.

None of this is simple

Hausmann, along with Walker, has launched an important debate here. The road to restructuring is never simple, and never straightforward: you’re announcing outright your decision not to pay back billions of dollars you’ve legally committed to paying back, and you better believe creditors are going to push back against that. Take one wrong turn and you can find yourself mired in an epoch-defining court fight: just ask the next Argentino you run into.

El camino es duro, pero es el camino.

28 COMMENTS

  1. “The idea is to change the conditions of the old bonds to make them unattractive. Like tattooing your ex’s forehead so she won’t be desired by anyone else.”

    You owe many of us new keyboards.

    Excellent article, but the real question is WHEN are they going to be forced into default? 2017? 2018? Or are we seeing the death throes of a Venezuelan default taking place at this very hour? This quote from last night is fascinating in its implications:

    http://www.reuters.com/article/us-venezuela-pdvsa-debt-idUSKCN12703X

    “As of the Prior Early Tender Deadline, substantially less than 50% of the aggregate principal amount of the Existing Notes have been tendered.”

    Substantially less? Wuzdat mean?

      • Yes. Your would need some very sane and rational people running Venezuela. People who had an actual plan that they could sell to international markets and the IMF and World Bank. Not the criminals that we currently have.

        • The Chavistas will never agree to the terms needed to make this a reality. It is not in their nature. They didn’t get into this “arepa de mierda” because they were doing things correctly.

        • Right. The quality of the issuer is the only thing to look at, and if terms are “complicated”, that’s end of cuento. What needs “restructuring” is the regime, and that’s the “not whether, but how”. Just my radical imperialist-capitalist opinion.

  2. Javier, nice piece.

    A couple of points. First, if local law is used to justify some unsavory things to screw over creditors, then a US judge under Chapter 15 will not confirm the plan of reorganization.

    I also don’t see the reason why Citgo would have to file for bankruptcy protection if it is servicing its debts as a standalone entity. Thoughts?

    Also, if I were a bondholder I would argue AGAINST a haircut in a restructuring, maybe an extension with some near-term breathing room, where you can PIK the coupons (i.e. pay the coupons with more bonds). PDVSA is experiencing a cashflow crunch, not a solvency issue. The company also has a lot of assets given the large amount of oil reserves and is in the crapper purely because of mismanagement.

    • If it’s 1-to-1 can it still be called a restructuring?

      A kind of restructuring-lite?

      (or is it a swap-heavy?)

      (Genuine questions.)

    • Two issues with your position:
      1. PIK debts carry over very negative debt dynamics. Imagine PDVSA growing its outstanding debt every year at a 9-10% compounded rate. And that’s even considering no more debt issuance (extreeeemely unlikely). Solvency would be an undisputable issue within a couple coupon payments in that scenario

      2. Haircuts in Present Value (the ones that matter to investors at the end) can and do happen when you offer a maturity extension on a bond; even though the face value doesn’t change, the market value of the bond does.

  3. Hausmann, Walker, and Ruiz are all disserting on a false premise: that exiting bondholders would want to make the bonds less attractive to vultures, etc. Of course, they will want to make the bonds more attractive to get a better exit price.

    All that is by the way. The insider bondholders will actually use “exit consent clauses” (and any other clause) to do what Chavismo was built for — to steal.

    • I get where you want to go. But it does not work this way. The “exit price” is represented in the conditions of the restructuring (namely, the haircut of the exchange for new bonds, if any, to say the least). That’s why the incentive is to make old bonds ugly for holdouts, precisely because that’s what holdouts don’t want: they profit on not joining restructurings, and introducing lawsuits to cash the old bonds at full price. That’s something that affects bondholders that accept to restructure, so exit consent amendments work as a defense mechanism for bonholders willing to restructure and the debtor as well.

  4. Legally Pdvsa has no exclusive right to exploit oil in Venezuela , the State has that exclusive right and it can do so directly , thru Pdvsa or any other company it chooses by granting them any number of exploitation right which are revocable or subject to loss , for any number of reasons , which of course include Pdvsa being unable to exploit its fields because of a financial mishap. This has been the case under Venezuelan law for decades now , before Pdvsa borrowed any money from anyone , if Pdvsa ceases to be able to exploit the oil fields then automatically the State must revoke it because these activities being reserved public purpose activities cannot simply be suspended same as public services cannot be suspended in the US because a power or phone company goes broke !! Pdvsa assets in Venezuela may in practice not be easily subject to seizure by foreign creditors because to the extent those assets are used in the performance of reserved pulbic purpose activities they cant be simply be sold or taken away , same as would happen in the US if some assets of a power company were seized threatening a city or region to a total electrical blackout. Not sure Pdvsa’s bankrupcy would automatically entail the bankrupcy of Citgo , In the Pennzsoil case there were affiliates of its counterpart which when the latter declared bankrupcy remained unaffected by its parent company bankrupcy…….!!These are thorny and difficult legal questions , one thing Im sure , creditors should not be too complaisant over the capacity of a US court to treat Pdvsa banrupcy as that of any US company sited in the US , considerable legal obstacles stand in the way of underestimating the difficulties that Pdvsa’s creditor would face in attempting to take control of Pdvsa operations assets or activities ruled by Venezuelan Law….!!.

      • Legal status of a corporation which is unable to pay its debts either from a surfeit of liquidity or from the mass of its debts surpassing in value the value of its disposable assets ….such that it either is subject to protection from its creditors to allow for a restructuring of its debts (liquidity problem) or to liquidation ( if value of assets below value of its liabitlities) , there are technical names for each of above situations , reference to bankrupcy above is not meant to be technical ….!!

        • They could try this route, but, it will frowned upon in US courts. Regardless of what the Chavistas try and pull, the bonds were issued in the USA, so US bankruptcy laws will be applied.

          Case law is a bitch.

  5. What does the expert audience think will be Schlumberger et al’s reaction to a PDVSA bankruptcy filing? Will they as suppliers of services, with a large payable backlog, keep working for pdvsa? Or will they punt? How about materials suppliers in the USA? There’s a significant amount of plant and well equipment needed to keep things running.

    • US oil companies will run to the US gubmint faster than a starving Venezuelan can devour an arepa.

      We have not even touched on the other international bond holders who will leverage US laws and courts to move their cases through at the same time. HINT: China and others are just as vested.

      This will be the most painful way to move forward. A coup would be less traumatic at this point. I’m not joking…

      The IMF is only buying time at this point. IMF has ZERO impact on US courts.

  6. And for those Chavistas dreaming of a PDVSA quick turnover and speedy Ch11 of Citgo, good luck with that.

    http://www.wsj.com/articles/citgo-auction-called-off-venezuela-owned-refiner-plans-debt-sale-1421798363

    All they did by going this route is start the throat slitting early and by raising more debt.

    The bank is utterly empty at this point and nothing to either auction or divest from. You can’t just “walk away” from debt after adding another round of it less than 1yr ago.

    This. Will. Be. Epic. To. Watch.

  7. How would the government sell politically a PDVSA bankruptcy? That would mean admiting they lost the economic war. They would rather die first.

  8. Either Pdvsa is capable of meeting its obligations and pay its liabilities or its not , if its not… then there is a legal case for advancing bankrupcy proceeding of some kind . Maybe the regime has no choice on the matter , but enforcing the rights of international creditors to seize or foreclose on Pdvsa assets or rights which exist outside the reach of US courts may not be that easy and in Venezuela (for most classes of assets) a well neigh impossible task. There are other creditors which have their own interest in recovering money loaned to Pdvsa and which are not bond holders …they will certainly join the melee and perhaps raise issues with make the enforcement of any US court decision even more messy than it already might be……!!

    What happened when the big car makers in the US went broke , was nothing done to protect their operations and business continuity ?? What happened to those carmakers bond holders and creditors , did they get all the money they were owed ?? Wonder what US courts did in those cases !!

    • The big 2 auto makers in the US took bailout money and investors got haircuts. But only on bonds that had been involved. We saw the collapse of dealerships overnight. But those automakers did not sell investors in other countries bonds for debt and try and walk away.

      Apple’s and oranages comparison. Plus the US gubmint is not effectively broke. US dollars still have some value.

      Oh, and when GM tried to hide the faulty ignition switch from the public after bankruptcy, the courts stepped in and said, “not so fast, those cars were impropperly made”

      Pdvsa has money in US banks where lawyers can get at it. And Venezuela needs the US market for selling oil into. US courts love to seize assets from people all the time. Even countries that stash their cash in our banks.

      • Dont know that the nationality of bondholders made a difference , they all got a hair cut or lost their money , when a company goes broke and cant pay its bills then the law under certain conditions grants it protection from the actions of its creditors , thats the law, be it in Venezuela or the US or anywhere else, The US govt intervened to save an important industry vital to the US economy from absolute ruin but lots of debtors lost their money……, they didnt get off scot free….!!

        There is no fraud involved if under the long standing laws of the country where the bulk of the assets of a bankrupt company are located, the foreclosure of those assets (when they are used to perform a public purpose activity) are subject to very strict restrictions , they were known to the creditors when they bought those bonds……, nothing underhanded in treating those assets as per the legal rules that have always governed their use and disposal in the country of their location .

        Pdvsa closed all of its bank deposits in US banks years ago ……the price of sold oil cargoes is paid thru deposit in countries and banks that arent automatically subject to the jurisdiction of US Courts , for instance in Chinese banks (where most likely Chinese lenders can get at them first) .

        You are thinking that this is about the current regime engaging in fraudulent acts to scape its obligations , but if you read Haussman its really about how to deal with a certain class of creditors who may attempt to derail a restructuring plan which professional businessman consider reasonable by refusing to agree to such plan in order to extort a more favourable treatment for itself than most other creditors have accepted ..!! Haussman (who is an enemy of the regime) as Quico has said is thinking of a possible situation where a regime change has ocurred and a new govt has to deal with the need to restructure Pdvsa ‘s debts on terms which allow 30 million people to continue to eat live and breathe even if that means that some investors who bought those bonds at half their price will not be able to collect 100% on the nominal value of those bonds !!

        I for one dont think that what Haussman and Walker are proposing is easy to implement nor that there wont be quite a number of Pdvsa’s creditors (not only the bond holders) who will ferociously seek to contest those proposed initiatives. Thats to be expected !! What Im saying is that a new regime taking over from the current one would not be totally defenseless against a concerted attack by the most recalcitrant of Pdvsa’s creditors to totally avoid a hair cut to their bushy hair do’s ….!!

        • I could be wrong about PDVSA having money in the US banking system, but Citgo does and it is ripe for the picking. As a subsidary of the parent company, it becomes an asset (and a debt!) for PDVSA, as far as I know.

          But we do agree 100%, H&W proposal is very far fetched and would require huge concessions to implement.

          There is no easy “out” for the current or future regimes.

  9. Mitch It might not be that far fetched considering the alternatives , Busting Venezuela so its people starve and Pdvsa has no money to operate wont help Creditors get their money back …a reasonable realistic restructuring plan might be best for every one ……. Dont count to much on Citgo , its already heavily mortgaged, its dependent on Venezuelan type crudes to operate at optimal efficiency, and when put in the market not so long ago the offers were so paltry that even the cash starved Pdvsa didnt think it worth while to sell. Concurr with you that there is no easy way out and that important concessions will have to be made by all (ncluding creditors) under current circumstances to get the best possible results ….. !!

  10. 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 this contracted in times where 100% of the Assembly was pro-government … I say this at the Caveat emptor.

    And in 2012 in El Universal published an article titled “PDVSA II?”
    http://petropolitan.blogspot.com/2012/03/pdvsa-ii.html

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