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Venezuela's Debt: Is the Game Afoot?

posted by Mitu Gulati

Mitu Gulati & Mark Weidemaier

The confusion over the status of Venezuelan debt over the past week has been remarkable. The government and its oil company, PDVSA, have, variously, defaulted, promised to pay, paid, claimed the money got stuck in bank purgatory, gotten a Russian bailout, triggered CDS contracts, hosted sham restructuring talks (with gift bags!), and more. All while humanitarian conditions worsen. The charade of being able to meet debt obligations may be nearing its end. The prevailing narrative is that investors are willing to be patient as long as they think the government wants to pay. But the investor mix may also be changing. Have the vultures (i.e. distressed debt investors) arrived?  

Two recent articles suggest that the answer is close to being a yes. In this article, from a couple of days ago, Landon Thomas of the NYT reports that, while more traditional investors are beginning to pull out, others who specialize in distress scenarios, like David Martinez of Fintech (a “mysterious” figure, Landon tells us), are entering. The next day, Bloomberg’s Katia Porzecanski published an interview with Jay Newman, formerly of Elliott Associates and infamous for leading the pari passu litigation against Argentina, who seemed very knowledgeable about the legal risks in Venezuelan bonds. (He is ostensibly retired, but one wonders if Venezuelan debt might tempt him out of retirement).

The Bloomberg story highlights an interesting difference of opinion. The markets seem to view PDVSA bonds as significantly safer than Republic bonds. Jay Newman views the former as near-worthless. Why the difference?

 

One answer may be that market prices, as of today, still reflect the views of short-term players betting on getting out after a few more coupon payments. Investors in distressed debt, by contrast, are interested in end-game scenarios. Perhaps there is also a sense that the current government will do everything possible to keep PDVSA current, given the importance of oil to the economy and the risk of asset seizure after default. (Note: there are no cross-default clauses connecting PDVSA bonds to Republic bonds.) But in the long run (which, in Venezuela’s case, could be rather short), when the money runs out and there is a default, PDVSA bonds are more vulnerable to a restructuring, as the government has many ways to threaten holdouts on those bonds. Conversely, as Anna has written, some of the Republic bonds may be especially tempting to holdouts. In any event, if distressed debt funds are indeed entering the picture, the end may be closer than people think.

As a side note, we generally agree with Newman that PDVSA bonds are more vulnerable to an aggressive restructuring. Some of the blunter proposals, however, risk subjecting the government to liability on a veil piercing theory. We have talked about that possibility here before. As one of us has described elsewhere, veil piercing claims in the sovereign context are hardly a sure thing. But an unvarnished attempt to strip assets could backfire by converting restructurable PDVSA debt into an obligation of the government itself.

To conclude, we leave you with this delightful quote from Matt Levine of Bloomberg, commenting on Katia’s interview with Jay Newman:

Back in Newman's day, like two years ago, giants roamed the earth, and sovereign-debt bounty hunters were larger-than-life figures with strong hearts, iron stomachs, and lifelong commitments to fighting with Latin American debtors. They watch this generation of fainthearted tourists tangle with Venezuela, and they are not impressed.

Comments

Good Article

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