Restructuring Venezuela’s Debt: An Update

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.

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.