How to Restructure Venezuelan Debt

By Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton LLP) & G. Mitu Gulati (Duke University School of Law).

There is a growing consensus that Venezuela will not be able to persist for much longer with its policy of full external debt service. The social costs are just too great. This implies a debt restructuring of some kind. Venezuela, principally through its state-owned oil company, Petróleos de Venezuela, S.A. (“PDVSA”), has extensive commercial contacts with the United States. Not since Mexico in the 1980s has an emerging market country with this level of commercial contacts 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.

The full article is available here.

Deterring Holdout Creditors in a Restructuring of PDVSA Bonds and Promissory Notes

By Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton LLP) & G. Mitu Gulati (Duke University School of Law).

Probably the main reason why the Maduro administration has not attempted to restructure Venezuelan sovereign debt is the potential mischief that may be caused by holdout creditors. The next administration in Venezuela — whenever and however it may arrive — will not want for suggestions about how to minimize or neutralize this holdout creditor threat. One option, before a generalized debt restructuring of some kind affecting all outstanding bonds, is for Venezuela to acknowledge that there really is only one public sector credit risk in the country and that the distinction between Republic bonds and its state-owned oil company, Petróleos de Venezuela, S.A. (“PDVSA”) bonds is artificial, and then to offer to exchange PDVSA bonds for new Republic bonds at par. The question will be, as it always is, how to discourage PDVSA creditors from declining to participate in such an exchange offer.

We suggest that one method might be for PDVSA to pledge all of its assets to the Republic in consideration for the Republic’s assumption of PDVSA’s indebtedness under its outstanding bonds and promissory notes. This is a step expressly permitted by PDVSA’s bonds and promissory notes. Existing PDVSA creditors would be perfectly free to decline to exchange their exposure for new Republic bonds, but they would face the prospect that a senior lienholder (the Republic) would have a first priority claim over any PDVSA assets that the holdout may attempt to attach to satisfy a judgment against PDVSA. That realization should make them think twice about the wisdom of holding out.

The full article is available here.

Venezuela’s Restructuring: A Realistic Framework

By Mark A. Walker (Millstein & Co.) and Richard J. Cooper (Cleary Gottlieb Steen & Hamilton, LLP).

Venezuela is confronting an economic and financial crisis of unprecedented proportions.  Its economy remains on a precipitous downward trajectory, national income has more than halved, imports have collapsed, hyperinflation is about to set in, and the government continues to prioritize the payment of external debt over imports of food, medicine and inputs needed to allow production to resume.  Bad policies are complemented by bad news as oil production and prices have declined dramatically from previous highs.  Financially, the country is burdened with an unsustainable level of debt and has lost market access.  Venezuela will be unable to attract the substantial new financing and investment required to reform its economy without a comprehensive restructuring of its external liabilities.

Given this array of problems, Venezuela and its national oil company, PDVSA, face what may be the most complex and challenging sovereign debt restructuring to date.  This paper proposes a framework for restructuring and discusses the key issues that will arise during the restructuring process.  These issues include the vulnerability of PDVSA assets outside Venezuela to actions by creditors (which affects, most importantly, receivables from petroleum sales and PDVSA’s interest in the U.S.-based CITGO); whether the restructuring should be implemented in one or two steps (an immediate restructuring versus the reprofiling of principal payments in the short term); the incentives and disincentives for would-be holdout creditors to join a restructuring; and the admissibility and treatment of various claims (such as PDVSA bonds that may have been originally issued at prices below their par value and claims against PDVSA for services billed at significant premiums to market prices).

The article is available here.

Mark A. Walker is Managing Director and Head of Sovereign Advisory at Millstein & Co.  Richard J. Cooper is a Senior Partner in the Restructuring Group at Cleary Gottlieb Steen & Hamilton, LLP.  The views expressed in the article are those of the authors only.

Pari Passu Undone: Game-Changing Decisions for Sovereigns in Distress

By James Michael Blakemore (Cleary Gottlieb Steen & Hamilton LLP)

In “Pari Passu Undone: Game-Changing Decisions for Sovereigns in Distress,” which appears in Issue No. 3 of the “Cleary Gottlieb Emerging Markets Restructuring Journal,” published by Cleary Gottlieb Steen & Hamilton LLP,[1] Michael Lockman and I examine a recent decision in White Hawthorne, LLC v. Republic of Argentina, No. 16 Civ. 1042 (TPG), 2016 WL 7441699 (S.D.N.Y. Dec. 22, 2016), regarding the hotly litigated pari passu clause.

Following an economic catastrophe in the early 2000s, the Republic of Argentina successfully restructured the vast majority of its more than $80 billion of debt, exchanging new bonds for those on which the crisis had forced default. In February 2012, Judge Thomas P. Griesa of the Southern District of New York, based on a boilerplate provision in the defaulted bonds known as the pari passu clause, enjoined Argentina from servicing its restructured debt without simultaneously making ratable payments to holdout creditors who had refused to participate in the exchange. This interpretation was unprecedented and, given the pari passu clause’s ubiquity in sovereign debt instruments, threatened to reverberate far beyond the specific facts of Argentina’s case. For nearly five years, anxious sovereigns and market participants were left to ponder the scope of these rulings. Most basically, would a sovereign debtor’s decision to pay some but not all of its creditors, taken alone, violate the pari passu clause?

Judge Griesa has now answered this crucial question. Following Argentina’s announcement, in February 2016, of a global proposal to settle its defaulted debt, a group of hedge funds brought suit, arguing in part that Argentina’s settlement with other creditors violated the pari passu clause. In White Hawthorne, Judge Griesa disagreed. The Court’s opinion confirmed that, absent aggravating circumstances—Judge Griesa mentioned specifically the “incendiary statements” and “harmful legislation” of Argentina’s former government—a sovereign debtor may pay some of its creditors and not others without running afoul of the pari passu clause. The decision does much to clarify the limits of the pari passu clause and deals a serious blow to creditors who would interpret the clause broadly to undermine future sovereign restructuring efforts.

The full article is available here.


[1] The firm represented the Republic of Argentina in the matters described in the article. The views expressed here are solely those of the authors and do not necessarily reflect those of the firm or its clients.

Puerto Rico Files for Bankruptcy Under PROMESA Title III

posted in: Municipal Bankruptcy | 0

By Richard J. Cooper, Luke A. Barefoot, Jessica E. McBride, Daniel J. Soltman, and Antonio Pietrantoni (Cleary Gottlieb Steen & Hamilton LLP)

On May 3, 2017, the Commonwealth of Puerto Rico (the “Commonwealth”) and the Oversight Board established by Congress pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) filed for bankruptcy under Title III of PROMESA in what is poised to become one of the largest bankruptcies in American history.

Drawing on first-hand experience[1] to provide unique background on the unprecedented fiscal crisis confronting Puerto Rico, lawyers from Cleary Gottlieb Steen & Hamilton LLP (“Cleary Gottlieb”) are preparing a series of articles to inform readers on some of the key challenges and strategic considerations that Puerto Rico and the Oversight Board face in implementing a restructuring under PROMESA.  To date, four articles have been published.

Why Puerto Rico Will Likely Rely On PROMESA Title III,” published before the recent Title III filing, discusses PROMESA’s two restructuring frameworks: Title III (broad-based, in-court proceeding) and Title VI (voluntary negotiations, similar to collective action clauses).  It focuses on some of the challenges that a Title VI proceeding would present and why, as opposed to Title III, it is likely not a viable forum for restructuring the Commonwealth’s obligations.

Issues To Expect In A Title III Puerto Rico Restructuring” surveys some of the difficult choices that the Commonwealth and the Oversight Board will need to make in order to implement a debt restructuring and delves into some of the novel issues likely to arise in a Commonwealth restructuring proceeding under Title III.

What Should Puerto Rico Offer Its Creditors?” considers restructuring currencies that the Commonwealth and the Oversight Board could offer creditors as part of a PROMESA restructuring. It focuses on four important elements that could facilitate a debt adjustment under PROMESA and create a stronger foundation for Puerto Rico to regain access to the capital markets and attract new investment.

Disarming Puerto Rico’s Pension Time Bomb” provides an overview of the key strategic drivers in reforming Puerto Rico’s underfunded public pension systems. This article identifies the two legal pension reform mechanisms available to the Commonwealth — legislative action or implementation of reforms through one or more Title III proceeding(s) under PROMESA — and provides an overview of the most important factors likely to shape the ultimate outcome.


[1] Cleary Gottlieb assisted the Commonwealth of Puerto Rico and its instrumentalities with their financial challenges prior to the recent change in government. The firm also currently represents the Government Development Bank for Puerto Rico on a legacy matter.