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If I Were a Holdout ...

posted by Anna Gelpern

Bond pricing has always been a puzzle to me, so I leave it to Mitu. But one thing has bugged me for more than a year. Ever since Venezuela has joined the ranks of the walking dead, market participants have differentiated among its bond contracts in a way that might seem sensible--even sophisticated--to those who think that investors do (or should) occasionally read the small print. In particular, Venezuelan bonds that require 100% of the holders to consent to an amendment of financial terms have fetched a higher price than comparable bonds with so-called collective action clauses, or CACs, which can be amended by either 85% or 75% of the holders, depending on the bond issue. The 100% bonds also have relatively more enforcement-friendly pari passu clauses, which could make it easier to replicate the fabulously successful holdout strategy in Argentina. The price premium must reflect rational investors on the eve of default paying for the power to veto a restructuring or drop out and get paid in full, right? Not quite. As you read the bond documents, the 100>85 reasoning unravels, and the 100% bond starts looking like a pretty fishy holdout vehicle.

For starters, a single mavericky holdout cannot accelerate under either the 100% bonds or the 85% bonds; both kinds require 25% of outstanding principal to vote in favor of acceleration in the event of default, and allow de-acceleration by a vote of 50%. Unless you are willing to wait until the original due date to collect the principal, you would need friends to vote as a block and presumably share the spoils of any holdout strategy.

Once you assemble the blocking position to accelerate and resist de-acceleration, the next task is to resist restructuring amendments that would be imposed on all bondholders. This is where the unanimous consent requirement should be most valuable, except that in Venezuela's case, it applies to a quaintly narrow range of terms. These are reproduced in full below from the bond issue due in 2027:

Vene 2027s_Page_082

Venezuela would need to secure 100% vote to change the due date, principal, interest, currency, amendment thresholds, and the tax gross-up. Any other term, including governing law, submission to jurisdiction, and status (pari passu) could be changed either by a simple majority of outstanding principal, or by two-thirds of the principal represented at a quorate bondholder meeting. The quorum is 50%, dropping to 25% if the meeting is postponed.

Translation: the 100% bonds looks so thoroughly susceptible to exit consents that would-be holdouts could end up waving their unblemished claims to 100 cents on the dollar before a magistrate in Tucupita until the howler monkeys come home.

Adding insult to injury, Venezuela is allowed to buy as many of these bonds as it wants in the secondary market.

Vene 2027s_Page_080I cannot tell from the disclosure document whether it can also vote its own bonds in a bondholder meeting, since the relevant term (what debt counts as "Outstanding" for voting purposes) is only defined in the underlying contract.  If there is no disenfranchisement term, or if that term is weak, Venezuela and its proxies could vote to de-accelerate or strip valuable covenants from the holdout bonds.

Meanwhile, the bond with CACs, apparently spurned by the markets, has a mile-long list of matters that require 85% approval--including pari passu and governing law--plus a pretty robust disenfranchisement provision for Venezuela, its state agencies and instrumentalities:

       Vene 2024 - 85 percent bond_Page_044CROP

Vene 2024 - 85 percent bond_Page_045 CROPPED

In most post-2003 issues, the price of introducing CACs was extending the supermajority threshold to a much broader set of terms, precisely to guard against exit consents. Venezuela is a case in point, hardly unusual.

Trying to think like a holdout, I am struggling to see how the unanimity requirement or the pari passu clause in Venezuela 2027s and similar CAC-less bonds could save me from the howling monkeys. ... unless I buy 50% of a 100% issue ... but then why not buy 15%+ of an 85% issue, or 25%+ of a 75% issue, if these are selling at a discount? Clearly, I would make a rotten holdout. But since I am staying in character, I am not even trying to argue the merits of CACs for the bondholder majority.

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