Caracas Chronicles

So, this happened. Ricardo Hausmann just teamed up with Mark Walker, a big time international debt lawyer, to push the debate on Venezuelan default, ahem, polite people call it “restructuring” into the nitty gritty. The question, for Hausmann and Walker, is how you put together a strategy to default without being taken to the cleaners by the vultures.

(Spoiler alert: it involves PDVSA declaring bankruptcy.)

Restructuring in the post-Argentina world is made more challenging because the holdouts’ success in that case means that bondholders inclined to negotiate a solution will have to explain to their own investors why they are not pursuing the potentially more lucrative holdout strategy.

Venezuela’s debt is different. About 60% of the country’s public foreign debt consists of bonds, with about half issued by the government and half by PDVSA. With few exceptions, government bonds have CACs, making it somewhat easier to address the holdout problem. PDVSA bonds have all been issued in the US and, as legally required of all corporate bonds, they do not contain CACs.

PDVSA may nonetheless be entitled to bankruptcy protection both in Venezuela and in the US. In this event, PDVSA could obtain a court-mandated standstill order with respect to legal action against it until a restructuring agreement is reached, thereby avoiding a disorderly seizure of assets.

As an additional form of pressure to secure participation, PDVSA’s exclusive right to exploit Venezuela’s hydrocarbon reserves can be withdrawn or modified. (Interestingly, both of these possibilities are highlighted as “risk factors” in the offering documents for PDVSA’s bonds.)

Both PDVSA and the government can also use “exit consents”: changing some of the bonds’ terms – the pari passu clause used by Argentina holdouts, as well as other significant provisions – through agreement with a simple majority of PDVSA bondholders and two-thirds of holders of most government bonds.

Venezuela could further distinguish itself from Argentina by committing to a strong reform program and seeking IMF support. Under the IMF’s exceptional access facility, Venezuela would potentially be eligible for more than $70 billion of new finance to support its reform program. And this backing should help to win strong support from its creditors.

I readily confessed I am way out of my depths here. But it’s certainly a piece you can’t afford not to read.