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A New Proposal for Restructuring Venezuelan Debt

posted by Mitu Gulati

The Venezuelan debt crisis has dragged on for so very long now that there are literally dozens of proposals out in the public domain (aka ssrn.com) on how Venezuela should do its restructuring.  Given how quickly the situation on the ground is changing, the plausibility of these various proposals also has been moving with great speed. 

A new and interesting one just showed up today from Daniel Osorio of Andean Capital (available here).  Daniel is someone who knows the Venezuelan situation inside out and has a lot of experience distressed debt workouts.  I don't think we agree on the optimal way to peel this onion, but Daniel is super smart and I always take his views seriously.  His proposal, as I understand it, is to do an debt exchange where investors are given what he calls Patient Capital Bonds. Basically, investors are being asked to be patient and cooperate with the Venezuelan government by giving them a lot more time to repay them (much more than say the proposals for a Venezuelan reprofiling (which would just buy the time for the IMF to do an estimate of the economic situation) have been asking for). The benefit to investors, that Daniel is positing will attract them to his proposals, is that there is a big potential upside if Venezuela is able to get economically healthy.

A couple of questions though.  First, is Daniel being unduly optimistic in assuming that the holdout problem can be easily solved?  (after all the amount of litigation on the defaulted debt is increasing on a daily basis and specialist holdout firms are the opposite of "patient" capital). Second, can Venezuela get back to health in a reasonable amount of time without imposing significant cuts on the principal obligations on its debt stock? (maybe, if the stretch out of payments is long enough, but that then brings its own problems in terms of getting investors to be that patient).

I do agree with Daniel though that stretching out payments will ultimately have to be part of the equation and that whatever mechanism that is used will need to ensure that the majority of creditors come in voluntarily (that is, the non holdouts). I also agree with him that the post-Saddam restructuring of Iraqi debt has lessons to teach us.

Here is the abstract of Daniel's nice and short paper (six pages):

Regime change in Venezuela is imminent. The transition may take longer than what most Venezuelans would like, but when it occurs it will be faster than most expected. The challenges of the reconstruction of Venezuela and its economy will be more similar to those faced by a country after a vicious war or a violent natural disaster than the aftermath of an economic and/or political crisis. First and foremost, this reconstruction must start by addressing Venezuela’s urgent humanitarian needs. This initial phase of the normalization of Venezuela must be done in a collaborative fashion between the private and public sector as well as Venezuelans and the international community. However, this spirit of collaboration must not end there, but continue in order to meet the economic challenges that Venezuela will face.

He also talked about this on the telly, on Bloomberg News. 

Comments

Your link to Daniel's paper throws a "404 error".

This one seems to work: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3361385

(just omitting the "&download=yes" bit)

I think discussion Venezuela discussion is premature, due precisely to the factor Daniel identified in the abstract: "The transition may take longer than what most Venezuelans would like, but when it occurs it will be faster than most expected."

There's too much uncertainty packed in to this situation to assess the ideal restructuring, though ultimately I suspect haircuts will have to be included in the calculus.

For example, the Maduro regime has chased away (e.g., to Saudi Arabia) some of the more skilled oil workers, who will need to be recruited & reorganized under the ostensible new government. The inevitably slow improvement in growth will not facilitate creditor patience.

The country's susceptibility to asset seizures also augurs against a gentler restructuring approach. I hope Daniel is correct but am unpersuaded.

It is an interesting piece by Mr. Osorio. I do think there is a tendency in most views regarding Venezuela to overlook certain aspects which I would consider key in a any structural solution moving forward: (1) What can the country do - in the long term - to remedy its perennial political corruption problem (which stretches past the Chavista regime); and (2) What would take American integrated oil companies to invest back in the country, and serve as conduit for much needed capex.

I believe most analysts would agree that rollover of oustanding indebtedness (through a PCB or whatever) would be a pretty straightforward solution to the specific problem of the sovereign (and quasi-sovereign) default. However, any long term solution requires addressing aspects which go behind simple financial arithmetic.

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