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Dienstag, 10. Oktober 2017

Buchheit and Gulati: The Coming Need for a Standstill in Venezuela

Buchheit and Gulati: The Coming Need for a Standstill in Venezuela

By Lee C Buchheit and Mitu Gulati
When officials of a new administration finally take office in Venezuela they will not have a pleasant first day on the job. On the present trajectory, they are likely to find international reserves exhausted, an oil sector in disrepair, a colossal debt, ruptured relations with the international community, hungry and angry citizens. Something disagreeable is apt to slither out of every file drawer they open.
Approaching official sector institutions such as the IMF for financial assistance will also present unusual problems. The Venezuelan authorities have not spoken to the IMF in many years. The last Article IV consultation took place over a decade ago. Unlike other sovereign debt crises, when an IMF mission arrives for the first time in Caracas it will have little or no reliable information about the state of the economy or public sector assets and liabilities. Several months will be needed for the IMF to make even a preliminary assessment of the situation, and no recommendations on an appropriate adjustment program or a debt policy can be formulated in the absence of that assessment.
What happens to Republic of Venezuela and PDVSA debt during this interim period? If the new administration arrives while the external debt is being serviced (the current policy), the authorities may well decide that continuing full debt service is neither feasible nor prudent. But defaulting on the bond debt may result in accelerations, lawsuits and attachments — all remarkably adhesive substances that are difficult to reverse and unravel once a debt restructuring begins. (This risk will be most acute for Republic of Venezuela bonds, all of which are issued under a fiscal agency agreement. Once an acceleration occurs, each holder will be free to pursue independent litigation.) Argentina defaulted on its bond debt in December 2001 but did not get around to proposing a restructuring of the instruments until 2005. By the time that proposal arrived, the litigation machinery had already been grinding on for years. It would do so, relentlessly, for another decade thereafter.
What will be needed in this situation is some form of temporary standstill on creditor actions that will give the new administration and the IMF time in which to assess the situation on the ground and allow the authorities, in consultation with the IMF and affected creditors, to formulate a plan for the treatment of outstanding liabilities. To be acceptable to creditors, however, a standstill must not prejudice the financial interests of creditors nor attempt to predict or prescribe the outcome of an eventual debt restructuring. It must do no more than inhibit maverick creditor actions during the standstill period.
As always, our preference is to look for solutions that can be implemented in a manner consistent with the underlying legal instruments rather than jettison the contracts in favor of more adventuresome approaches such as trying to jury-rig a bankruptcy proceeding in one jurisdiction or another.
Unfortunately, simply shifting the due dates of payments falling due on Republic and PDVSA bonds during the standstill period will probably not work. Such an amendment would require the approval of 100% of the holders of the PDVSA bonds and 100% of the holders of Republic bonds that do not contain collective action clauses. It would need the affirmative vote of holders of 75% (principal amount) of most Republic CAC bonds, 85% in the case of two series; thresholds that may not be achievable. Nor could a payment default under PDVSA bonds be waived with less than the unanimous consent of holders. Constructing a standstill mechanism will therefore require finding a measure that can be approved by a bare majority of the holders of each instrument (or two-thirds in the case of Republic CAC bonds).
One feature shared by both PDVSA and Republic bonds is a requirement that holders of at least 25% of the principal amount of the bonds of a series must consent before the principal of the bonds can be accelerated. Each of these instruments, however, permits holders of 50% of the principal amount of the bonds of that series (66⅔% in the case of Republic bonds containing collective action clauses) to amend this provision to specify a higher voting threshold to accelerate the bond.
One possible approach is this: Immediately upon taking office, a new administration in Venezuela could request the holders of each outstanding PDVSA and Republic of Venezuela bond to approve an amendment increasing the voting threshold for acceleration from 25% to, say, 51%. That modification would terminate after six months — long enough for the IMF to make a preliminary assessment of the economy and for the authorities, in consultation with the IMF and the affected creditors, to formulate a plan for restructuring the debt. Scheduled payments of principal and interest falling due during the standstill period would continue to be outstanding and would continue to bear interest. The failure to pay those amounts on the scheduled due dates during the standstill period could not, however, result in an acceleration of the instrument unless at least a majority of holders voted in favor of that acceleration. The majority holders would thus at all times control the process.
Making an acceleration of a bond series more difficult will naturally be of little help if the full principal amount of the bond had matured during or before the standstill period. If the bond in question had a collective action clause, the authorities could seek to use that provision to defer the maturity date until the end of the standstill period. If not, the authorities might request holders to roll over maturing principal until the end of the standstill period, but they probably could not force holders to do so without attempting more coercive measures.
This is the optimistic scenario; the new authorities take office before the Venezuelan external debt has been allowed to slip into a messy, litigious default. If the new administration is not that lucky, it may need to ask creditors (or courts) to suspend any pending enforcement actions while the situation is being assessed and a recovery plan is being formulated.
Would the majority of bondholders support a temporary standstill? We think they would. With the memory of Argentina still fresh, investors realize that chaotic and litigious sovereign debt workouts rarely improve the recovery value for most creditors.
Lee C Buchheit and Mitu Gulati are at Cleary Gottlieb Steen & Hamilton LLP and Duke University, respectively.

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