Caracas Chronicles

Before 2016 is out, PDVSA may be forced to file for bankruptcy. It’s hard for a Venezuelan to even read those words without flinching. The image of PDVSA as a bottomless barrel out of which you can always get more and more cash is so deeply burned onto the Venezuelan political psyche that the words “bankrupt PDVSA” seem oxymoronic – like “dry water” or “moderate chavista.”

PDVSA can’t go bankrupt. I mean, surely that’s just impossible…or is it?

What seems like plain lunacy to normal people has become a live debate inside the legal profession. Bond markets have just about concluded PDVSA will not make its October bond payments. With some PDVSA bonds now yielding north of 130% – the kind of interest rate that would make your neighborhood payday lender blush – for Wall St, it’s a foregone conclusion: barring a dramatic surge in oil prices, PDVSA will default.

As we’ve long discussed on this blog, PDVSA bonds have no Collective Action Clauses. There is no way to negotiate an “orderly” default of PDVSA’s debt: even a large majority of bondholders can’t compel a small minority to accept it.

And believe me, if there’s a default, those holdouts will not be few. The people still buying PDVSA 2016s this late in the game are not doing it because they’re expecting them to get paid on schedule: they’re betting that the amount they’ll be able to recover after long, painful, protracted court battle with the company will be higher than the paltry price the bonds are going for right now. The fancy term is to call them legal arbitrageurs, pero en verdad lo que son es bachaqueros de tribunal.

Come to think of it, why don’t PDVSA bonds have Collective Action Clauses? They don’t have Collective Action Clauses because PDVSA is a company, not a country. There’s a name for what happens when companies default on their debts, and that name is:

Bankruptcy

It’s precisely because countries can’t declare bankruptcy that sovereign bond contracts have these odd-ball collective action clauses. CACs are the exception. The rule is bankruptcy. A company that can’t pay its bills knows what it has to do: go to court and beg a bankruptcy judge to put some orden en la pea with its creditors.

You need a process like that because without “bankruptcy protection”, a corporate default would soon turn disorderly. Different creditors would make bids to seize various bits of the corporation’s assets haphazardly, some might seek to get its bank accounts frozen, soon, the company wouldn’t be able to operate at all.

And that is very much the kind of scenario PDVSA could quickly find itself in if it misses those October bond payments – a scenario that, lest we forget, is now the consensus among those who put actual money into PDVSA these days.

Come October, PDVSA could easily find itself in a situation where it’s impossible for it to transact or operate outside Venezuela’s borders: its shipments and refineries seized, its bank accounts frozen, the legal and financial infrastructure of a large transnational corporation jammed.

Of course, los rusos tambien juegan, and PDVSA now appears to be actively taking steps to sidestep this fate. This piece in Bloomberg, which describes the creation of a new “Compañía Anonima Militar de Industrias Mineras, Petroliferas y de Gas” or Camimpeg, caused a minor freakout in PDVSA bond markets. Why? Because it’s easy to imagine how the government could try to shield PDVSA’s assets from creditors by just shifting them to a new corporate shell – a military shell in this case.

Are there all kinds of clauses in PDVSA’s bond contracts aimed at preventing this kind of shenanigan? You betcha. Is it legal? In principle, no.

If PDVSA is found to be hiding and transferring assets to avoid debt collection it could even accelerate the maturity of some of the rest of its financial debt. In theory, any transfer done to defraud creditors could be declared void by a judge. It’s a deeply dangerous game they’d be playing.

At this stage, the most likely outcome would appear to be a series of enormously complex, costly, long-running legal battles across multiple jurisdictions with contradictory or unenforceable rulings that will pay for many a fancy lawyer’s BMW while leaving Venezuela’s oil industry operating under an impenetrable cloud of legal uncertainty long into the future.

The scale of the legal mess being cooked up almost defies description.

As a Venezuelan-registered company, PDVSA would have to declare bankruptcy in Venezuelan court. At the same time, since PDVSA’s bonds are issued in New York and are subject to U.S. law, the legal proceedings to recover assets would be launched there, setting the stage for a kafkaesque jumble of suits and countersuits in multiple jurisdictions with no end in sight.

The Venezuelan part of this alone would be a kafkian nightmare. Bankruptcy proceedings are notoriously slow and cumbersome, and prey to all the same vices the rest of the Venezuelan court system is sadly famous for.  And remember that a PDVSA bankruptcy procedure will include more than just bondholders: all its other creditors will have a dog in that fight too. Remember PDVSA’s 20 billion commercial debt? How about that 2 billion loan from Chevron? You may not remember, but you can be sure they do.

And there’s more: bankruptcy will force open the Pandora’s box that is PDVSA’s labor liabilities, include the long-delayed severance payments owed to the 23,000 workers fired during the 2003 Paro Petrolero.    

Just consider that VIASA’s (in comparison, infinitely simpler) bankruptcy is still tangled up in Venezuela’s bankruptcy bureaucracy 20 years after the fact. A PDVSA bankruptcy would certainly drag on for decades.

And all of that is before you stop to puzzle through the intractable interactions between Venezuelan and U.S. court rulings that would tangle this thing up into one giant, hope-defying knot.

But forget the legal mess: it’s the political and, well, historic resonance of the thing that interests me. At some point, a formal declaration would have to be made that PDVSA is now bankrupt. Just pause to grasp the impact of that.

As a symbolic bookend to the total economic calamity the Chávez era has become, one could hardly hope for greater clarity. Chávez always spurred his followers to dare to dream the impossible. Now, his movement has delivered. Because if there’s one thing every Venezuelan knows is that for PDVSA to go bankrupt is impossible.