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 renegociacionsoberana@mppef.gob.ve.

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

44 COMMENTS

  1. I wonder who the holders of the PDVSA 2017N bond are. To the extent that the government/Russia/China owns some significant fraction of the issue, then it will take longer to round up 25% of bondholders that agree that it’s a good idea to notify the trustee/PDVSA and accelerate.

    Also, the Nov 13th meeting seems absolutely critical. If the government shows up with a sloppy team, no information and an absurd refinancing proposal, that may precipitate acceleration. If they’re “constructive” and serious about things, then they may yet kick the can down the road, I think. We will see.

    • Bueno, but it quickly becomes unmanageable. If they don’t pay the 2017Ns they’re probably going to miss the coupon payments next week too…whole new cohort of accelerators coming onstream day by day…

  2. This is it!!!! As I said earlier, happy to negotiate a friendly restructuring with good terms (a la Ukraine, Uruguay, etc). If it is not friendly and terms are bad, then happy to go court (from Argentina’s example, we all know it can be painful and lengthy but it is also very very profitable). Btw, the treasury has already said that US individuals can go to the meeting, they just can’t sign contracts, etc. People just like to read headlines but they have no idea how things work in practice (Bloomberg journalists are literally 21 year old interns writing things without any detail). Ultimately, non-US people can swap into a bond sold under another jurisdiction and US holders will have to sell or buscarse la vida. I suspect american banks are withholding the payment.

    But what it interesting here is that people are now crying about default. You wanted this scenario for months, now you have it and you don’t like it?! You called for this, now cherish the moment!

    • Yes, but people are going to starve as a result… I mean much more than they are now. Being right, and betting for hunger and destruction are a similar thing in Venezuela. So happy intellectually, but bothered overall.

    • “But what it interesting here is that people are now crying about default. You wanted this scenario for months, now you have it and you don’t like it?! You called for this, now cherish the moment!”

      And you came to this blog over and over again, being very obnoxious and calling stupid anyone who even hinted that default might be a possibility in the not so distant future, yet you now show up and have the “squared balls” to make a comment like this one.

      Some people have no shame…

      • Default might have been a possibility. That doesn’t mean that it prevents you from making money, which is, frankly, all I care about in connection to my investments.

    • It would have been so much easier to have begun renegotiation earlier when conditions were more favourable , now there is more chance of having a traumatic process with a much bigger chance of failure , Im quite sure that someone smart like FRod probably tried convincing the regime to go about it at least 18 months ago , but the upper ups wouldnt listen…

      Renegotiation was inevitable but the regime wanted to patch up its authoritatian political status and that meant posponing the inevitable until certain political goals were secured .Now we all will have to pay for the worsening of the consequences.

      Venny reads quite correctly that the US warning doesnt necessarily prohibit a meeting (with people other than those named in the sanctions ) but rather reaching any agreement which involves the exchange of old bonds for new ones and or the modification of the payment terms on the existing bonds, which in practice amounts to pretty much the same thing ……Vennys point at this stage although valid is totally moot.

      The idea that US bondholders can get arround the sanctions by swapping bonds in another jurisdiction is naive in the extreme , the language of the sanction is so broad that any effort at circunventing its intended effect is bound to run foul of the very cunning drafting of the sanctions provisions.

      Is Pdvsa default a good thing ?? in the short term probably no , unless it leads to the regime having to face decisions it has been avoiding for too long …….and which in the long term stand a chance of improving things for everyone…., the other alternative of course that in the long term it leads to the replacement of the current regime by another led either by the opposition or by more rational components of the Psuv movement .

    • Mmmm, why would you enter a restructuring as non-US investor, if the government committed itself to make payments during the negotiations? Meaning, US investors will get paid even as they can’t participate or sign any kind of deal, while non-US take the burden? That does not sound like a good investment.

      US sanctions make any restructuring deal unlikely, thus a messy default may (if the government does not cure the current one with the payment of the 17s and the pending coupons) take place. How on earth is that a good investment if you were long PDVSA since it was trading above 50 or 60? Sure, awesome carry during those years, but for what?

    • yes, Ira, I had the same reactiom. Quico and Mucci didn’t say they were unhappy with the default and they were the only commemtors befor Vennytrader. No big deal, I guess.

      • My comment about unhappiness were not specifically aimed at unhappiness from Toro and Mucci, more about the atmosphere from most oppo-radicals: “the payment of hunger bonds at the expense of the poor bla bla..” And now that there is a chance of restructuring, to ease the burden of payment, people don’t seem to like it? Again, isn’t this what most people have been asking for and what muppet Borges has been touring for during the past months (at the expense of Venezuelan tax payers btw)? Oppo-radicals are clearly irrational.

        Actually, I tend to have quite cordial exchanges with F. Mucci, it’s just Toro who is typically more hostile.

  3. This is an article we all needed to read at this very moment when news are so confusing . so thanks Francisco for being timely and informative , we now understand more of the current situation than by reading any other publicacions.,

    We are reaching a tipping point , just before the screws on the fragile financial contraption built to support Pdvsa finances turn loose and the whole thing comes crashing down !! Bond holders must be shy of setting the whole process loose now because the legal actions once started will involve puttign into operation such a doomsday machine, a wrecking ball as the financial world hardly ever sees happening. .

    The regime of course is aware that the games up for all practical purposes and that it has no credible way of reaching a working deal that can sattisfy most of the creditors aspirations , Pdvsa is prettly nearly moribund from all news that leak out …….It is then concentrated in seeking for ways to either put pressure on the US Govt to lift at least part of the sanctions to allow them some additional time to attempt a restructuring and position themselves in a narrative that can be used to justify itself before its own capitve population and arouse their sympathy. ,The end game is clearly to make people see the US govt as the culprit of all the aggravated suffering and hardship which will be triggered on default being officialy declared.

    Putting El Aissami to head the restructuring refinancing is a tell tale sign of its intent in this area, if they were serious in wanting one they would have placed someone less toxic to head the discussions , they mean any restructuring effort to fail……!!

    One small correction is in order , the practice of having title and risk over the oil pass to the buyer on the oil being delivered to the vessel that will transport it to its destination is pretty nearly universal in the oil market , what is unusual is for such large portion of venezuelas production being sold to the chinese or to the russians for disposal or onselling elsewhere . Also the now standard policy of having such large portion of the income flowing from the sale of the oil deposited in banks out of reach of the wests banking (and judicial) system in Russia and China and to a lesser degree in Portugal.

      • Can Pdvsa really go on indefinitely without producing the products or oil or income it needs to maintain operations and still pay its many creditors so that they dont take legal actions capable of seriously hobbling its continued operations ?? or once default is declared be able to circunvent the measures their creditors will take to seize Pdvsa’s offshore assets and recievables and freeze their money accounts or prevent the delivery of the equipment and materials they need to purchase to mantain their activities ?? I am not certain that they will be able to do so….this is what I mean by reaching the tipping point , not that it will imnediately cause the regime to fall , but it will certainly create further pressures on the regime, maybe challenging its capacity to remain in power .

        Where will Pdvsa get the money it needs to finance the central govts many expenses when even as we speak its unable to pay all the taxes it owes the govt under the law.

        Do you have an answer to these questions??

        • Anyone can answer your question.

          No. Default doesn’ t matter, since there is no one to contest their power. They have complete control of the situation. They don’ t need money, since they can do whatever they want to the people, remember they rule over a country of zombies. They will take what is left from honest hard-working venzuelans, while HRA prepares himself to inevitably lose the next fake elections. They will solve their problems like they have always solved them by enslaving people and taking what is not theirs. So the default thing will only end up with regular people suffering more radical socialism, which is what they (Maduro and companty) wanted in their place.

          The worse thing than can happen for them is that they have to use more violence, and they are pretty sure they can do that just fine (and with the MUD’ s help). They just have to offer some sort of fake elections to the political parties, which they will accept, and that’ s it.

          A mí nunca me ha importado el tema de la solvencia, ni el tema económico, porque siempre me ha quedado claro que para Chávez e incluso más para Maduro, lo que importa es imponer un sistema comunista.

          Ellos no destruyeron la economía por el placer de destruirla, la destruyeron para imponer un sistema distinto, y por eso era estúpido pensar que se iban a detener o que iban a colapsar justo cuando estaban obteniendo lo que querían desde un principio. Todo lo que hemos vivido hasta ahora no sido sino una transición hacia el comunismo.
          El default no es el fin de la dictadura, sino el momento de su consolidación. Ellos nunca van para atrás, siempre para adelante.
          Con el poder absoluto de la ANC y la oposición completamente arrodillada, lo único que va a provocar el default es la profundización del modelo comunista. Habrá, quizás, algunos focos de violencia y de resistencia que serán aplastados con la colaboración de la oposición política, La oposición política participará en elecciones falsas, y seguirá perdiendo.
          Todo esto es tan obvio que da incluso fastidio decirlo.

          • People pretend to answer my question but dont really address the question I make which relates solely to Pdvsa continuity as a working company and as a source of income for the regime , the political consequences will be what they are and am not sure how predictable they are !! It is difficult for regimes to function without money , they might but it makes their hold on power more frail , ultimately they go under or have to change the way they operate and become more rational ………This is what history teaches us , look at the Soviet Union, Maos China, Viet Nam in the end failed economics did them in…..and they had to either give way to different systems or evolve into something else. Cuba has survived thru the mass subsidisation of the Soviet Union first and Chavez Venezuela later but they have seen the writing on the wall and have been trying for some years to start an opening that allows them to transform their economy so that it becomes more attuned to that of the capitalist world , they have been blocked now by Trumps accession to the US presidency , they may survive but they cannot thrive , they are large scale prisons with no future except the starved life of a failed system.

            Why has the regime year after year gone to such extremes to avoid default ??, because they fully understand the peril for their survival that a break down in Pdvsa economic viability can imply for them …….they have sacrificed the country to maintain bond payments ….in ways that seem unconsciounable ……..but which have gained them time…it now appears that they are no longer able to continue regular payments and must refinance or reorganize future payments in the worst possible circumstances , to do so they must give in to creditors demands that they improve their economic policies and practices , which they either will accept of face the huge problems that a total economic breakdown entails and which they so fear .!!

  4. This is a situation that present lots of potential opportunities that the Trump administration could exploit to push for the downfall of the Maduro regime. For instance, the oil trade embargo would make more sense now to give the last blow.
    However this by it self wouldn’t be enough, even if the Regime finally collapses for lack of money and unplayable debts, Venezuela wouldn’t be safe until a foreign military intervention / occupation comes in to control the mafias and the narco-corrupt armed forces.
    Unfortunately I don’t see the opposition prepared nor receptive to this scenario.

  5. “We’re used to chavismo bulldozing its way out every problem with brute force and money”

    I would add another missing ingredient. Chavismo had popular support from ‘el pueblo mesmo’. But as of now, just see how many writers of Aporrea have parted ways with Maduro, let alone the starving people heaving under hyperinflation. (I am willing to concede that pueblo support was a consequence of social spending, i.e. money).

    Chavismo started as a military movement and is now consolidated into a naked military dictatorship. Brute force is a genetic component to it. They are essentially the wrong people to deal with a debt crisis which requires subtlety and intelligence. Este peo no se arregla a los conazos, and all they now is dar conazos. They are way above their heads here and they don’t even know it… yet.

    My father was part of a team of young Chicago Boys economists during the 70s working for the left wing military government of Peru. They would explain complex economic analysis to the generals in charge. They would be dismissed as out of touch eggheads and be ORDERED to explain it in simple terms, like, “just give me an average instead of all that crap!”.

    The generals starved their people, and being stubborn generals, they starved them for far longer than they should have.

  6. The idea that bondholders will/can pressure the U.S. Govt. to back off financial sanctions to allow a restructuring is beyond wishful thinking, as is that anything will come of 11/13’s meeting, which any sane international financial adviser will avoid like the plague (as one said, “I prefer sleeping in my own bed at night.”). VT’s bravado at default is whistling in the dark.; Argentina’s restructuring, which really was done with a legally-acceptable government, took many years, and their bonds traded at 15 for a long time; other cases saw bonds trading at 7–and these were serious/legal/internationally-sanctioned restructurings supported by multilateral financial institutions. VT very likely pyramided down on his Venny investments, and literally has everything to lose if Venezuela becomes Cuba II and never pays (not my scenario, due to the final needed “nuclear option”, which, I believe, is the most-likely only way bondholders may see part of their money returned eventually)….

    • NET. It took Argentina 10 years to pay but they had to pay 100% plus interest…I am happy to sit for 10 years if necessary regardless of the market price. Venezuela/PDVSA are NOT going to be off the hook.

        • True Lorenzo. I am more of a long-term investor so my handle is not an accurate representation of my investment style. I just couldn’t come up with anything else and I have been sticking to it for a while now.

          But, as opposed to mom and pops, I don’t need to sell (regardless of what Mr. Toro and others here write). Not quite the same story for poor ol’ Bill:

          https://www.bloomberg.com/news/articles/2015-02-03/venezuela-bond-bet-crushing-new-yorker-s-retirement-dream

          Speaking of which: “DTC Is Said to Tell Banks PDVSA Paid Principal for 2017 Bonds”

          Boomtownnnnnnnnn

          I do have to say, this website is quite good for the purposes of serving me as a base for my contrarian investing approach. It helps me remain focussed so I do like it!

      • VT, as one money manager said, “If I had had the keys of the Argentine Finance Ministry, I could have solved their financial crisis in a couple of months. But, if I were given the keys to the Venezuelan Finance Ministry, I would give them back.” I do think you probably will eventually be saved by a “tipping point’, like the one that tipped Reyes Reyes upside down. And, you know what Keynes said about the “long run”….

  7. Wtf? How do you accelerate a bond that is already past due? This was the last principal payment. It is already “accelerated”. i.e. nothing will happen

    • Acceleration refers to bonds that have future payments due. The standard clauses of bonds due from now until 2035(for example) typically include a provision stating that if any court declares that any of the bonds issued by the same entity(?) are in default then the bondholder has the right to demand payment immediately. If issuer does not pay as demanded, the bondholder can go to a judge and ask that any assets that the bondholder has found to be in the name of the issuer be transferred to the bondholder as payment. Can the 51% of Citgo that has been put up as guarantee to Rosneft be attached by a jilted bondholder?

      • That is correct, then it is other bondholders (other than PDVSA 17s) who can accelerate their bond. A court ruling is not necessary to trigger the cross default provision, only a request by holders by 25% of the relevant bond.

        • Any request by holders of 25% of the relevant bond, regardless of the reason? Wouldn’t this be equivalent to an embedded put, which an issuer would like to avoid?

          • There has to be nonpayment or acceleration of obligations for borrowed money (bonds or loans) in excess of USD 100 million

  8. “Needless to say, los rusos tambien juegan. 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.”

    I am no lawyer but I believe that if you can prove the Russians are getting repaid on a loan, within a general default, you could go after what the Russians have received.

    • I think he refers with “the rusos también juegan” to the football (soccer) saying often used in latin america, to state that “the other team” also plays and has its plans. Instead of making a direct reference to the Russians in this particular case with PDVSA.

  9. wonder with the 25% threshold required to launch an action, how much of the defaulted issue is held by government, central bank, PDVSA or other interests that woudlnt start anything like the chinese or russians… if they were smart and had ability they would’ve been securing 50%+ of the issue months ago making the launch of a challenge difficult..

  10. In the Economist article citing CC is a disturbing quote from a European source saying that the EU’s strategy is to force the Chavistas to negotiate with the opposition to find a solution. How do you negotiate democracy with a dictatorship or freedom with an oppresson. If Venezuela is counting on the EU, this will be a long process.

    • Finding a solution through negotiation is the European way. It’s what they do.

      They’re currently negotiating with radical Islam so both sides can live in peace.

  11. Meanwhile, the Financial Times says “Bondholders are likely to be more patient on declaring a default than holders of CDS — who typically want to get paid as soon as possible — because legal clauses would mean PDVSA would be in default on all its bonds, not just the 2017 security. That raises the possibility of a bizarre situation where PDVSA’s credit insurance pays out, but bondholders still eventually get paid in full as well.” It offers a much more balanced view of this huge mess, far away from the temperamental one of Mr. Toro. You can read it here https://www.ft.com/content/1986587e-c4cc-11e7-b2bb-322b2cb39656

  12. Regarding “los rusos también juegan”, PDVSA’s contractual conditions for international sales always had a clause that property of the cargo would pass to the buyer at the loading port. In the golden days when PDVSA had a stellar rating, this clause would prevent any taxes – including profits on upstream operations in Venezuela – being charged at the destination country.

  13. Excellent and interesting article, thank you man! What i wonder is, how does this help to get Maduro out? The venezuelan people can’t get any worse already since a while, i dont see how the sanction and the fast default helps getting rid of Maduro.
    Is it possible that the americans prime goal was to get control or all of Citgo out of venezuelas hands? I would assume Citgo would one way or other land in american investors hand, certainly not russian.
    Will be interesting days to come for sure!!

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