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.