Venezuelan Debt: Further Thoughts on “Why Not Accelerate and Sue Venezuela Now?”
Mitu Gulati and Mark Weidemaier
Earlier, we posted about whether holders of Venezuelan bonds would be better off accelerating and obtaining judgments sooner rather than later. In a nutshell, here was the point:
When a restructuring comes (and it will), the two primary weapons the restructurer is likely to use are CACs and Exit Consents. A bondholder who obtains a money judgment, as best we can tell, escapes the threat of either CACs or Exit Consents being used against her.
We heard from a number of people with questions prompted by the post. Here are some of them, and our conjectures as to answers.
- Is there really no precedent for using contract terms to “unwind” a judgment?
We don’t know of any. As mentioned in our earlier post, it is clear that some contract rights survive the judgment. This includes the pari passu clause, according to Judge Griesa’s opinion in the NML litigation, which allowed bondholders with money judgments to assert a new claim for injunctive relief under that clause.
On the other hand, the pari passu clause isn’t a great analogy here. Among other reasons, it was used in the NML litigation to give a new remedy to creditors who already held money judgments. What we’re looking for is a case where other parties (either the judgment debtor or other creditors) used contract rights to negate or modify a judgment obtained through litigation. We know of no authority examining the use of CACs or Exit Consents, so we looked a bit farther afield. What about acceleration rights?
Bonds issued under a trust indenture, like PDVSA’s bonds, typically allow a creditor minority (usually 25%) to instruct the trustee to accelerate. After acceleration, the trustee usually conducts the litigation, but there are some situations in which individual bondholders can sue. Importantly, a typical indenture also allows a creditor majority to rescind a declaration of acceleration. What if such a rescission happens after one or more individual bondholders have obtained money judgments?
For readers interested in this topic generally, we’d recommend a September 2016 article in Butterworths Journal of International Banking and Financial Law called “Trust Indentures and Sovereign Bonds: Who Can Sue,” by Lee Buchheit and Sofia Martos, both experts in the field. The article also includes this fascinating quote from the commentary to the American Bar Foundation’s model indenture provisions:
By the terms of the indenture, an acceleration of maturity can always be annulled by the holders of a majority in amount of the debentures. The procuring of a judgment by a few debentureholders on the basis of the accelerated maturity and a subsequent rescission of acceleration would present a most difficult problem whose solution is not to be found in any decided case.
A most difficult problem indeed! It apparently wasn’t clear to the drafters of the ABF model indenture provisions whether a creditor majority could de-accelerate a bondholder’s claim after it has been reduced to judgment, and we haven’t found anything since to clarify the question. But perhaps some of our readers know of something we have missed? (For readers with access to the ABF Commentaries, the quote is on pp. 234-35).
- What about my interest rate? What am I earning on unpaid interest and principal if I get a judgment?
This is what investors seem to really care about – and perhaps for good reason, because interest rates differ as a function of whether one obtains a judgment. These differences may explain why investors would prefer to defer litigation. With the important caveat that we are not experts on these questions, our sense is that, after an investor reduces her claim to a judgment, that claim will accrue interest at an unattractive rate.
More particularly, if the bond says (and most do) that interest will accrue at the contractual rate "until the principal is paid in full," then:
- Interest continues to accrue on principal post-maturity/acceleration at the contract rate, and
- Interest will accrue on unpaid amounts of interest post-maturity/acceleration at the 9 percent NY statutory rate (until judgment). Once a judgment is handed down, the judgment will bear interest at the federal statutory rate (which is more like 3 percent -- it floats based on US Treasury rates).
The differences between contract and statutory interest can be dramatic, especially post-judgment. That can provide some incentive to delay litigation, although delay can also backfire.
There were echoes of this tension after Argentina’s default. Those who followed that crisis may recall significant differences in the strategies holdout creditors pursued. For example, Dart got judgments early, thereby protecting itself from Argentina’s possible use of Exit Consents. NML, by contrast, waited somewhat longer, often to spectacular effect. Some readers may recall the infamous FRANs, which yielded spectacular returns to NML. (The FRANSs are described by Matt Levine of Bloomberg here; also note the fun graph depicting the significance of computing interest at the contract rather than the statutory rate).
Ultimately, waiting proved advantageous for NML, although it might have regretted its decision if Argentina had used Exit Consents to modify the bond contracts before judgment. But then, perhaps the fact that Dart had already obtained money judgments discouraged the use of Exit Consents…?
At this stage, it is hard for us to see Venezuela abjuring the use Exit Consents. That said, if enough holders get judgments, the value of using Exit Consents diminishes. And if the end result is that Exit Consents are not used, then the ones to gain the most will be those who waited longest.