By Mark Walker (Guggenheim Securities)
Lee Buchheit and Mitu Gulati have proposed an innovative and aggressive strategy to facilitate the restructuring of Venezuela’s external debt based on consensual agreement between Venezuela and a supermajority of its broad creditor universe. Borrowing from the United Nations Security Council’s decision (supported by action of the United States) to shield Iraq’s assets from seizure by its creditors in order to promote a restructuring of Iraq’s debts, they propose that the Security Council or (more likely) the President of the United States by Executive Order shield Venezuela’s assets (particularly revenues from the sale of oil into the United States) from legal process. The rationale for their proposal rests on the premises that (1) virtually all of Venezuela’s foreign exchange is generated by sales of oil into the United States, (2) the revenues from exports of oil to the United States are vulnerable to attachment by creditors and therefore a small group of aggressive creditors could strangle the entire economy of the country, (3) existing restructuring techniques are inadequate to the task and (4) the policy of the United States is to promote the restructuring of sovereign debt based on an agreement between the debtor state and a supermajority of its creditors in the context of a process in which all creditors are bound by the vote of a supermajority.
This article argues that (1) a new Venezuelan government (which all agree is a prerequisite to a restructuring) will have substantial means to shield the country’s oil revenues from seizure by creditors, (2) a new government will also be able to expand its foreign exchange earnings to include sale of oil outside the United States, (3) the proposals do not create a mechanism to allow all of Venezuela’s creditors to have a voice in the terms of a restructuring — by supermajority or otherwise — and would treat U.S. and non U.S. creditors differently and (4) the unintended consequences of the proposals advanced by Buchheit and Gulati would negatively affect the ability of emerging market sovereigns, and Venezuela in particular, to fund themselves in the debt markets and would be disruptive of the sovereign debt market generally. Referring to the paper that the author and Richard Cooper wrote one year ago, the author argues that there are tested, market-based mechanisms to achieve the goal of a consensual restructuring arrived at by a supermajority vote of creditors, in particular a restructuring of PDVSA’s debts under a newly enacted Venezuela law that is implemented with the support of a Chapter 15 proceeding under the United States Bankruptcy Code.
The full article is available here.