October 10, 2017 / 12:00 PM / a year ago

Buchheit calls for post-Maduro Venezuelan debt standstill

LONDON, Oct 10 (IFR) - Any incoming regime in Venezuela replacing President Nicolas Maduro will have to consider how to gain temporary relief from paying its creditors without giving them legal grounds to accelerate their outstanding debts, according to legal experts.

One solution will be to create “some form of temporary standstill on creditor actions”, according to Lee Buchheit, partner at law firm Cleary Gottlieb, and Mitu Gulati, law professor at Duke University.

Venezuela is struggling to service debts with a combined face value of US$63bn after a collapse in oil prices left it with dwindling revenues and a huge fiscal shortfall. Talks are already being carried out bilaterally between Venezuela and its sovereign creditors, China and Russia, which are owed US$37.2bn between them, but policy-makers in the country still face complex challenges to find a long-term solution.

In an article for FT Alphaville, Buchheit and Gulati acknowledge that their earlier idea of persuading holders of Venezuelan sovereign bonds and those of state-owned oil company PDVSA simply to extend the maturities of their instruments while keeping most other terms the same, may not be workable in this situation. Voter thresholds of up to 100% are too high in the bonds.

Instead they say a standstill mechanism would be best approved by a “bare majority of the holders of each instrument” or two-thirds of each republic bond, since the latter have collective action clauses that can sweep up holdouts from such votes. That level of votes is enough to amend the voting threshold to allow an acceleration of the bonds from 25% plus one to a higher level.

Buchheit and Gulati suggest this could be used as soon as a new administration takes over to lift voting thresholds to over 50% for six months to allow the regime, and outside bodies like the IMF, to assess the situation and then propose a more lasting debt restructuring. This would stop accelerations during this six-month period if principal or interest is unpaid in that time, unless a majority opted to do so.

This contrasts with a plan put out by Mark Walker, former lead adviser to Greece for Lazard during the country’s €200bn debt restructuring in 2012 and now managing director at Millstein & Co. He and Richard Cooper, another partner at Cleary Gottlieb, suggested that a new Venezuelan regime should put PDVSA into bankruptcy protection, either through US Chapter 15 or another regime, before defaulting.

“Our preference is to look for solutions that can be implemented in a manner consistent with the underlying legal instruments rather than jettison the contracts in favour of more adventuresome approaches such as trying to jury-rig a bankruptcy proceeding in one jurisdiction or another,” Buchheit and Gulati wrote.

Buchheit also advised Greece on its debt restructuring in 2012. (Reporting by Christopher Spink)

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