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.

Sovereign Debt Restructuring and English Governing Law

By Steven L. Schwarcz (Duke University School of Law)

This Roundtable post is based on the author’s forthcoming article, Sovereign Debt Restructuring and English Governing Law, scheduled for publication in a symposium issue of the Brooklyn Journal of Corporate, Financial and Commercial Law (available at http://ssrn.com/abstract=2952776).

Unsustainable sovereign debt is a serious problem for nations as well as their citizens and creditors. It also is a threat to global financial stability. The existing “collective action clause” contractual approach to restructuring that debt is inadequate. At the same time, a multilateral framework, such as a convention or treaty, is not currently politically feasible. Recent research shows a drastic rise in sovereign debt litigation by holdout creditors, suggesting the urgency of finding solutions.

This article proposes a novel legal framework, focusing on governing law, for restructuring unsustainable sovereign debt. Because a significant percentage of sovereign debt is governed by English law, the UK Parliament has a unique opportunity to modify that law to include the legislative equivalent of perfect aggregate-voting collective action clauses in all English-law governed sovereign debt contracts. That not only would facilitate the fair and equitable restructuring of unsustainable sovereign debt; it also should ensure the continuing legitimacy and attractiveness of English law as the governing law for future sovereign debt contracts.

The article also proposes and examines the text of a model law that Parliament could consider as a basis for its legislation. Additionally, the article explains why, even absent Parliamentary enactment, a model-law approach could contribute to the incremental development of sovereign-debt-restructuring norms.

The full paper is available here

Solving the Pari Passu Puzzle: The Market Still Knows Best

By Sergio J. Galvis (Sullivan & Cromwell LLP)

As a result of the Argentine sovereign debt crisis and ensuing holdout litigation saga, the pari passu (or ranking) clause became a source of great consternation in the international sovereign bond market. Specifically, Judge Griesa’s holding that Argentina had violated the pari passu clause by refusing to pay creditors who had not participated in the nation’s earlier debt exchanges, and the accompanying requirement that Argentina had to pay those holdout bondholders, led to uncertainty in the market regarding the leverage holdouts could exercise in sovereign debt restructurings going forward. Concern was expressed over the ability of sovereigns to succeed with voluntary exchange offers premised on the threat that the restructuring sovereign would default on payments due to non-participating bondholders. This article evaluates the impact of the court’s decision in the Argentine litigation to date, including subsequent court decisions that have helped reinforce the view that the equitable holding in favor of the holdouts in the Argentine saga is a narrowly prescribed outcome that is unlikely to be repeated absent extraordinary circumstances. It then examines the adoption of improved ranking clauses and collective action voting clauses in recent issuances of sovereign debt in the effort to bring greater certainty to market participants and facilitate efficient restructurings in the future without the need for extra-contractual restructuring mechanisms and remedies.

The full article is available here.


For other recent Roundtable posts related to sovereign debt, see Lubben, “Sovereign Bankruptcy Hydraulics“; Gulati and Rasmussen, “Puerto Rico and the Netherworld of Sovereign Debt Restructuring“; and a Cleary Gottlieb update on Puerto Rico’s bankruptcy.

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.

Sovereign Bankruptcy Hydraulics

By Stephen Lubben (Seton Hall University School of Law)

The frequent suggestion that the world needs a sovereign bankruptcy mechanism is puzzling.   What precisely would be gained?

The core of any insolvency system consists of a stay against creditor action, an ability to recover preferential payments, and an ability to revamp the debtor’s operations by rejecting burdensome contracts and selling assets. These features, however, are largely irrelevant to sovereign debtors.

In the event of insolvency – or, more simply an inability to pay – sovereign debtors have four tools at their disposal. First, the sovereign might hide behind its immunity, by refusing to be sued. Or the sovereign might change its own law applicable to the debt. That might violate norms, but the sovereign who does this probably also controls the remedy for violations of such norms. Third, the sovereign might manipulate the currency in which its debts are paid. There are economic consequences to doing this, but they might be preferable to a formal default.

These first three tools comprise the modern concept of “sovereign immunity.” But a discussion of sovereign debtors must include a fourth, related issue: the ability to shield assets from collection. That is, even if the debtor can be sued somewhere, in some court, a judgment might be worthless.

If a government issuer can employ some or all of these mechanisms, it has little need of a bankruptcy mechanism because it can refuse to pay its debts, or it can negotiate with creditors to restructure the debt on its own. Kings and queens of old had no need for a bankruptcy mechanism because they could use all four of these tools. They would pay when they felt that paying was worth it, such as when they needed more funds from lenders.

Of course, there are differing forms of “sovereign immunity.” Few sovereigns retain full, old-fashioned sovereign immunity. Today, many emerging market borrowers and all American municipalities lack access to the first three tools. Their ability to avoid paying turns on the fourth tool, which they can deploy with varying ability.

In short, sovereignty and sovereign immunity occur along a continuum, and the need for a bankruptcy system to address financial distress varies inversely with a sovereign’s place on the continuum.

My short paper, Sovereign Bankruptcy Hydraulics, forthcoming in NYU’s Annual Survey of American Law, examines this basic dynamic and its implications for the insolvency of sovereigns and semi-sovereigns.

Restructuring Sovereign Debt after NML v. Argentina

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

 

The decade and a half of litigation that followed Argentina’s sovereign bond default in 2001 ended with a great disturbance in the Force. A new creditor weapon had been uncloaked: The prospect of a court injunction requiring the sovereign borrower to pay those creditors that decline to participate in a debt restructuring ratably with any payments made to those creditors that do provide the country with debt relief. For the first time holdouts succeeded in fashioning a weapon that could be used to injure their erstwhile fellow bondholders, not just the sovereign issuer. Is the availability of this new weapon limited to the aggravated facts of the Argentine default or has it now moved permanently into the creditors’ arsenal? Only time (and future judicial decisions) will tell. In the meantime, however, sovereigns will occasionally find themselves in financial distress and their debts will occasionally need to be restructured. Venezuela already casts this chilly shadow over the sovereign debt market. If, in a galaxy not too far away, sovereign debt workouts are to have any chance of an orderly completion, a method must be found to neutralize this new weapon.  Judging by the secondary market prices of different series of Venezuelan sovereign bonds, large amounts of money are being wagered that this cannot be done.

Argentina’s holdouts argued that they must be paid in full if Argentina wanted to make any payments to the creditors that accepted the country’s restructuring offers in 2005 and 2010. Those creditors had accepted a roughly 75 percent haircut in the value of their claims. But the holdouts were not offering to share with those old creditors any portion of a preferential recovery that the holdouts might be able to extract from Argentina. Why? Because the bonds that had been tendered in the restructurings of 2005 and 2010 had been canceled. The clause in those instruments that the holdouts now pointed to as the basis for their demand for a “ratable” payment whenever Argentina made a payment to its restructured lenders had been extinguished in the bonds previously held by those old lenders. So no contractual basis existed for the old creditors to assert a reciprocal claim against the holdouts.

It didn’t have to be this way. A future workout of New York law-governed sovereign bonds could be structured so that any bonds tendered by participating creditors are kept alive in a kind of deep freeze, available to assert a reciprocal claim against any holdouts who subsequently extract a preferential recovery from the sovereign issuer. The sauce that is flavorful for the goose thus becomes an equally suitable condiment for the gander.

The full article may be found here.