Ahora sí. Final payment on PDVSA’s 2017N bond never reached investors’ accounts yesterday. The time for spinning things out with byzantine discussions about Bank Mondays is over. It’s been a full week since payment was due, and PDVSA is now plainly in default, anyway you spin it.

So, what happens next? Well, the principal for the 2017 is now due and payable and the bondholders may start to go to court to demand payment and the seizures of PDVSA assets to collect their debt. This is an Event of Default, and likely to set off cross-default clauses in other PDVSA bonds: with other holders of other issues also gaining the right to go to court against PDVSA and start picking through its assets.

The Nuclear Option

But bad as default and cross-default are, they’re not nearly as bad as what could come next: acceleration. And it’s nasty little brother, cross-acceleration.

When triggered, acceleration makes the full sum of the debt come due at once. Miss one interest payment? Guess what, now you owe the entire principal.

And when one bond accelerates, holders of other bonds can do so, too — that’s cross-acceleration. That can mean that bonds that were supposedly due eons from now – say, in 2035 – come due immediately.

All of these complicated questions end up before gringo judges.

To be clear, PDVSA’s bondholders haven’t begun proceedings to attach assets yet, and they certainly haven’t set off acceleration or cross-acceleration. Once default happens —and it has— it would take 25% of holders of a bond to come forward for acceleration to be triggered.

It’s the nuclear option. It may never come. For sure, there’s a lot of litigation to go between now and then. Christmas came early for Venny bond lawyers. 

Needless to say, los rusos tambien juegan. PDVSA has been preparing for this day for a long time. For instance, the way its contracts are structured now, the oil it sells becomes property of the buyer the second it’s loaded onto a ship. The reason they do it like that is precisely so a U.S. court can’t seize the oil.

Then again, bondholders may decide to go after PDVSA’s accounts receivable, or other assets – refineries, Citgo, Altuve…who knows? Vulture fund lawyers have been around the block.

All of these complicated questions end up before gringo judges.

The legal battle ahead is massive, and will take years. Competent, non-crazy people are on the government’s side. PDVSA has been able to retain competent legal representation in the US – hotshot lawyers who charge an arm-and-a-leg, and are worth it. Get mentally prepared: all kinds of motions will be tried, some will fail, some will go through, then they’ll all be appealed. Esto va pa’largo, and PDVSA’s lawyers are smart. Then again, not even the best lawyers in the world can save it when your client is both an idiot and guilty.

And it all gets much worse if acceleration clauses get triggered.

This is the really evil part: if the 2017N is accelerated, all other bonds issued by PDVSA (and even some of their non-bond loans) accelerate too.

It’s not just the debts due this week, it’s the whole $30 billion pile of debt PDVSA’s built up over the years. After acceleration, the company is exposed to lawsuits and injunctions not just from holders of the 2017N that defaulted, but all other bondholders too.

Sound daunting? It should. This is why default+cross-default+acceleration+cross-acceleration freaks economists out so much.

Not even the best lawyers in the world can save it when your client is both an idiot and guilty.

Look, PDVSA could still surprise us all and wind down this default like, tomorrow. It would be inelegant, but not catastrophic. Bondholders just want to get paid. Make the payment in the next few days and even though it would technically have defaulted, no one would have gone to court, and the bonds wouldn’t have cross-defaulted, much less accelerated or cross-accelerated.

Tempted by Maduro’s promise of quick cash, bondholders may just prefer to sit on their hands a bit longer before making this a peo de abogados.

Monday Madness

Everything now hinges on the atomic November 13th meeting Maduro announced with Tareck El Aissami’s Debt Restructuring Committee. Since Tareck is a bigtime drug kingpin U.S. individuals and entities are forbidden from doing business with, U.S. bondholders are allowed to go and listen, but not to wheel-and-deal.

People considering attending the meeting had to request authorization from the US government just to show up and are expressly forbidden for negotiating and signing anything. Many don’t even want to think about it. There’s some speculation that PDVSA has promised sanctioned individuals will not attend which — fuck logic. No one even knows where the meeting will be. It’s a shitshow: disorganized, chaotic, goonish — just what you’d expect. If the government turns up at that meeting unprepared or spewing propaganda or BS, acceleration becomes a very live possibility.

We’re used to chavismo bulldozing its way out every problem with brute force and money, but this time there’s no Tibisay or Maikel to bend the rules. There’s no printing press to come up with the money. There is no ANC to arbitrarily imprison people or change the law. Rule-bound US Judges you can’t buy or remove are going to be in charge of enforcing deals you agreed to.

Any questions? Write to [email protected].

[This post is updated to clarify the role of cross-default.]

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