postings by Mark Weidemaier

Marblegate and the Use of Exit Consents to Restructure (Venezuelan) Sovereign Debt

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati.

About a decade and a half ago, exit consents were a big deal in sovereign debt restructuring. At the time, sovereign bonds governed by New York law required unanimous bondholder approval before any modification to the payment terms of the bonds. The result was that creditors could easily hold out from a restructuring. Needing to mitigate the holdout problem in Ecuador in 2000, sovereign debt guru Lee Buchheit borrowed a technique from corporate bond restructuring practice in the United States. There, the Trust Indenture Act forbids out-of-court bond exchanges that modify "the right of any holder ... to receive payment ... or to institute suit" without the consent of each affected bondholder. To oversimplify, Buchheit leveraged the fact that other terms of the bonds could be amended with a lesser vote, often a simple majority or 66.67% of the bonds. This meant that potential holdouts risked having key protections stripped from their bonds in a restructuring that won the approval of a majority of bondholders.

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Stripping PDVSA's Assets

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati

In a previous post, we talked about how ordinary corporate-law principles, and especially the rules concerning piercing the corporate veil, might play an important role in any debt restructuring conducted by Venezuela or PDVSA, the state oil company. As an example, we cited the fact that PDVSA doesn't own the oil reserves it exploits and the possibility that Venezuela might transfer the right to exploit these reserves to a new entity. Readers who have been following the Venezuelan crisis will recognize that we were not-too-subtly referring to a proposal floated back in October 2016 by Ricardo Hausmann and Mark Walker, writing on Project Syndicate. (Registration required.) In a nutshell, their proposal with regard to PDVSA is that Venezuela can induce PDVSA creditors to participate in a restructuring--conducted either in bankruptcy or through the use of exit consents--by withdrawing or modifying PDVSA's right to exploit hydrocarbon reserves. Essentially, that is, Venezuela can strip the company of its primary productive asset.

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Mr. Regling's "Alternative Facts" About the Greek Debt

posted by Mark Weidemaier

(This is a joint post by Mark Weidemaier and Mitu Gulati.)

In November 2016, Klaus Regling, managing director of the European Stability Mechanism, announced that reforms were going so well in Greece that it would be able to return to the private debt markets by 2017. It's 2017, and neither the markets nor the IMF seem to share the sentiment. Yields on Greek bonds, already high, have increased, and the IMF has concluded the debt is unsustainable. Greece needs an infusion of cash to make a large payment due in July, but the private debt markets aren't willing to oblige.

What does Mr. Regling say? That the IMF (and, apparently, the markets) are wrong; that the ESM's long time horizon and Greece's relatively low debt servicing costs mean there is no cause for alarm (Financial Times, subscription required). Referring to the 174bn euros that the ESM and EFSF have already lent to Greece, he says: "We would not have lent this amount if we did not think we would get our money back." Implication: the IMF and the Euro area nations should lend even more.

Continue reading "Mr. Regling's "Alternative Facts" About the Greek Debt" »

Veil Piercing When a Sovereign Owns the Shares; Venezuela Edition

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati.

At least in the short term, the odds of Venezuela continuing to service its mountain of external debt are looking slightly better, though long-term prospects remain bleak. State-owned oil company PDVSA may be even worse off. A default or restructuring by one or both borrowers will raise issues that are typically peripheral in a sovereign debt crisis. If Argentina's pari passu saga tested the willingness of courts to approve novel injunctions, Venezuela's debt crisis will test the willingness of courts to disregard the legal fiction that corporations are separate legal "persons." That fiction means that a corporation's shareholders are not liable for corporate debts (or vice versa), unless a creditor can "pierce the corporate veil"--i.e., prove the shareholder abused the corporate form to engage in "fraud or inequitable conduct."

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Paul Blustein's Laid Low, and Some Musings on the Next Crisis

posted by Mark Weidemaier

(This is a joint post by Mark Weidemaier and Mitu Gulati)

We jointly teach a class on international debt, focusing on what happens when sovereign governments and the entities they control go bust. We love this class, because we work with our students to design a restructuring plan for a country in financial distress, and our students often come up with terrific ideas. This semester, we're focusing on Venezuela, which would involve an enormously complicated restructuring. One reason is that Venezuela has not exactly cozied up to the IMF, which typically plays a key role in a restructuring. To get a sense of the IMF's role and limitations, we asked our students to read Laid Low, Paul Blustein's new book about how the IMF played a part in managing (and mismanaging) the Greek debt crisis. Blustein is a terrific story-teller, with rare access to key players at the IMF and elsewhere. Although we followed the European debt crisis closely, much of what's in Laid Low was new to us.

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Pari Passu Nevermind

posted by Mark Weidemaier

One last (I hope) gift from the pari passu litigation against Argentina: this opinion ruling that Argentina does not breach its pari passu obligations by paying holdouts like NML (who recently settled claims against the country) or by paying bondholders who had previously participated in its 2005 and 2010 exchange offers. The result was basically a given. The judge was hardly going to lift the injunction only to reinstate it when the next holdout came along. The interesting question was how the judge would distinguish bondholders who refused Argentina's latest settlement offer from bondholders who had refused prior offers.

There was an obvious and sensible answer. Because holdouts already have claims for money damages, the meaning of the pari passu clause isn't all that important unless violation produces a different remedy, such as an injunction. But an injunction is appropriate only when the benefits to the plaintiff exceed the costs to the defendant and third parties. Now that Argentina has made a reasonable settlement offer (in the court's judgment) and obtained the assent of the vast majority of bondholders, an injunction might do more harm than good. Thus, in the opinion linked above, the court holds that, whatever the meaning of the pari passu clause, an injunction would be inappropriate because "significantly changed circumstances have rendered the pari passu injunctions 'inequitable and detrimental to the public interest'" (p. 9). So far, so good. But the opinion doesn't stop there. Instead, the court's primary ruling is that the selective payments Argentina is currently making do not violate the pari passu clause at all.

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Disarming Holdouts in Sovereign Debt Restructurings

posted by Mark Weidemaier

The pari passu litigation against Argentina—discussed extensively here on Credit Slips, on FT Alphaville, and elsewhere—caused many people to worry that future government debt restructurings would become more difficult. Some have their eye on Venezuela as the next to default, though the country and its troubled state-owned oil producer PDVSA stubbornly continue to pay external creditors despite dire economic and humanitarian circumstances. Wherever the next crisis occurs, there will be interest in devising ways to avoid the fate that befell Argentina.

A quick re-cap: federal courts in New York (i) interpreted the pari passu clause in Argentina’s contracts to forbid the country to keep current on its restructured debt unless it also paid holdout creditors in full and (ii) implemented this ruling through an injunction preventing financial and other intermediaries from helping Argentina continue making payments. Some worry that this remedy, if widely applied, could make it impossible to restructure.

So…what to do? Here’s a new proposal from Lee Buchheit (Cleary Gottlieb) and Mitu Gulati (Duke). It’s cute. And it has a clever name: the Cryonic Solution.

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Uber Helps Me Revise My Contracts Syllabus

posted by Mark Weidemaier

I've been meaning to post about this recent decision, by Judge Rakoff in the Southern District of New York, denying motions by Uber and its CEO Travis Kalanick to compel arbitration of a class action lawsuit. More coverage here (Bloomberg) and here (Law360). The lawsuit alleges that Uber suppresses price competition among drivers in violation of the antitrust laws. The court's opinion covers some arcane issues of arbitration law, such as the defendants' argument that the plaintiff had to arbitrate the question whether an arbitration agreement existed. (Answer: No.*) But mostly, the opinion is about contract law--or rather, about how not to design a system for forming contracts on-line.

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Ukraine's Defense: Russian Suit Part of a "Broader Strategy of Aggression"

posted by Mark Weidemaier

It has taken several months, but the Russian Particulars of Claim and Ukraine's Defence (akin to complaint and answer in U.S. civil procedure) have now been filed. Distilled to its essence, Ukraine's response, as the Financial Times notes, is that "if you wanted your money back you should not have invaded our country." Or as Ukraine's lawyers put it in the Defence: "The [Russian] claim forms part of a broader strategy of unlawful and illegitimate economic, political and military aggression ... aimed at frustrating the will of the Ukrainian people to participate in the process of European integration." 

Russia's version of events is straightforward and looks like any other debt case: Russia lent the money, Ukraine committed a breach of contract by not repaying. Ukraine, by contrast, will have a harder time translating its defenses into the dry language of legal doctrine. But it can be done. As I have written here at Credit Slips, and in more detail elsewhere, contract law provides Ukraine with a number of potentially viable arguments. Now that we know the arguments asserted by Ukraine, here are some preliminary thoughts.

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The CFPB's Proposed Rules on Consumer Financial Arbitration

posted by Mark Weidemaier

As has been expected for some time, the Consumer Financial Protection Bureau has issued a proposed rule that would prohibit companies providing consumer financial services from pairing arbitration clauses with clauses that prohibit consumers from bringing or participating in class actions. The rule also imposes disclosure requirements on companies that use arbitration. The CFPB's announcement is here; the proposed rule is here. There are two main components.

First, covered providers of consumer financial products can still include pre-dispute arbitration clauses in their contracts, but those who do must explicitly state that the consumer retains the right to bring or participate in a judicial class action. The rule requires that the following language be included in the contract: "We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it." (As an aside, the CFPB rule only applies to class actions brought in court. Companies may forbid class action proceedings in arbitration, and I imagine that careful drafters will want to do so expressly.) Second, the Bureau proposes to require covered providers to submit information about claims filed by or against them in arbitration, including copies of the arbitration demand, any response, and the arbitrator's award (see p. 362-363 of the proposal). The Bureau apparently hasn't made up its mind about whether it will make this information public or will merely use it to monitor arbitration proceedings. 

 

Puerto Rico Restructuring Options That Don't Rely on Congress

posted by Mark Weidemaier

The revised draft PROMESA bill (available here) is now under debate in Congress. The bill appears to respond to some early criticisms, although its length and complexity obscures answers to some important questions. Under the circumstances, it seems sensible for the Commonwealth to consider all of its options, including those that do not require Congressional action. These include, as Mitu Gulati and I write in the Financial Times (here, subscription required), changing Puerto Rico's own law in ways that might facilitate a restructuring. 

We asked law students in a class we taught jointly at the University of North Carolina and Duke to consider ways the Commonwealth could restructure without Congressional authorization. Working in groups, they came up with some answers that are both creative and plausible. That doesn't necessarily mean easy or agreeable from the perspective of Commonwealth politicians. Some proposals envision amending Puerto Rico's constitution, while others rely on provisions of Puerto Rico law that authorize collectively binding debt modifications but that haven't been previously applied in this context. The important point, however, is that Puerto Rico may have a wider range of options than many think. The attractiveness of these options is relative. If Congress cannot provide an effective restructuring mechanism that respects the Commonwealth's right to democratic governance, other lawful options will begin to seem more attractive. Two of the student groups have made their work available on-line; their short papers can be found at the links above.

Puerto Rico And (Very) Soft Executive Power

posted by Mark Weidemaier

Melissa's post asked what the executive branch could do to facilitate restructuring of Puerto Rico's debt. I'll get to that, but I first want to talk about Puerto Rico itself. At first glance, the Commonwealth seems to be in a uniquely terrible position. It has the disadvantages of a sovereign (e.g., no bankruptcy) but lacks the advantages (e.g., legal and/or practical immunity from legal enforcement). In fact, it lacks only most of the advantages. One advantage of sovereignty it does enjoy--and that many "true" sovereign borrowers are obliged to forego when they borrow--is that much of its debt is governed by its own law. That law can be changed (subject to constraints in the U.S. constitution) or interpreted in ways that give the Commonwealth needed restructuring flexibility. 

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Argentina and the Holdouts Reach a Deal

posted by Mark Weidemaier

The title pretty much sums it up, but this fastFT article gives a few details. The short of it: $4.65 billion to the group of holdouts led by NML (a roughly 25% haircut, reportedly), with the payment still requiring legislative approval in Argentina.

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