LONDON, Sept 20 (IFR) - Venezuela should put its state oil company PDVSA into Chapter 15 US bankruptcy protection and then default on an estimated US$63bn of bond obligations, according to the lead adviser to Greece during the country's debt restructuring in 2012.
In a newly published paper, Mark Walker, who worked at Lazard when he advised Greece and is now managing director at Millstein & Co, argues that Venezuela should prioritise using oil export revenues to remedy social chaos rather than keeping its debt repayments whole.
The paper was written with Richard Cooper, a partner at law firm Cleary Gottlieb.
But, the paper argues, a default on Venezuela's and PDVSA's obligations (with a combined face value of US$63bn) only makes sense if the country's prime assets, principally its oil reserves, are protected from creditors.
“When the inevitable default occurs, and it will no doubt come sooner than the current regime prefers, policy makers in Venezuela will have to grapple with what may be the most complex and challenging sovereign restructuring ever, and they will need to act quickly, possibly as newcomers to government in the midst of a disorderly default,” the paper says.
In the aftermath of a default, the Venezuelan government, with the backing of the International Monetary Fund, could have a straight discussion with its various creditors about how to make its debt sustainable again, the paper says.
Eventually, they foresee the country offering restructured creditors an oil-linked value recovery instrument with a twist. These would be “designed to pay out based on actual increased revenues attributable to increases in the price of oil (rather than production)”.
Talks are already being carried out bilaterally between Venezuela and its sovereign creditors, China and Russia, who are owed US$37.2bn between them. Both have accepted oil as payment in kind for loans previously provided to the Latin American country.
Walker and Cooper’s solution for PDVSA draws heavily on what Lazard and law firm White & Case carried out for Azerbaijan earlier this year when restructuring the state-owned International Bank of Azerbaijan.
In that instance a new bankruptcy law was passed in Azerbaijan which was immediately recognised in the US as equivalent to Chapter 15 under the United Nations Model Law on Cross-Border Insolvencies. That allowed Azerbaijan to use local law to protect the bank’s assets from international creditors.
Croatia also enacted similar legislation to protect supermarket Agrokor from its creditors earlier this year.
Walker and Cooper suggest a new local law, the “Venezuelan Public Sector Revitalisation Law”, would be similar to the recovery one enacted by Puerto Rico to protect its electricity company PREPA from its creditors. Millstein and Cleary Gottlieb advised Puerto Rico on its restructuring earlier this year.
The co-authors accept that if Venezuela's current regime, led by President Nicolas Maduro, tried to introduce such measures “it would be unlikely to gain any Chapter 15 recognition” in part because of US sanctions against Maduro and others in the regime.
However, they envisage the new law being enacted by a new government “attempting to overcome a humanitarian and economic crisis of historic proportions created by prior administrations ... we assume that at such time US policy will be to promote a restoration of Venezuela’s economy.”
If Venezuela is unable to achieve this, or a US court deems not to recognise its new law, then an alternative could be to make use of the English courts and seek approval for any bond restructuring through an English law scheme of arrangement.
There is a precedent for issuers with seemingly little connection to the UK establishing such links, by either shifting their “centre of management interest” to London or changing the law of their bonds to English law. This was done by Ukraine company DTEK and only requires a simple majority to effect.
“PDVSA would solicit consents to support new restructuring terms for its debt and approve the amendment of its bonds so that they are governed by English law and submit to the jurisdiction of the English courts,” said Walker and Cooper in the paper.
The duo admit that protecting PDVSA is only half the story, with the country’s own directly issued bonds posing significant hurdles of their own to a successful restructuring.
A major problem is that none of these outstanding bonds can be aggregated with other issues and individual votes will be required to change terms, making them vulnerable to investors holding out for better treatment.
“Given the absence of an aggregation clause in the Republic’s collective action clauses and the high thresholds for activation of these clauses ... to succeed, any restructuring ... will have to consider the aggressive use of any and all available restructuring tools,” they said.
Walker and Cooper recommend using exit consents for those accepting a restructuring offer, making the notes not exchanged less attractive to hold. In addition notes exchanged could be kept in a creditor trust that could qualify for better terms should holdouts extract these from Venezuela at a later date.
“The inclusion of a sharing clause in the old bonds as part of the exit consents ... would require any holdout creditor that managed to recover more on its bonds ... through legal process or otherwise, to share such excess payment ratably with all other holders of outstanding Republic bonds,” they said.
Such an idea was proposed to Puerto Rico’s creditors.
The paper asks whether debt recently issued by Venezuela at a significant discount to par should be excluded from being treated as a “par instrument” in any restructuring.
However, it says there are many different classes of Venezuelan debt, making it hard to come to any general conclusions.
“It would be a serious mistake for arguments over this issue to paralyse efforts to arrive at the terms of a comprehensive restructuring for Venezuela,” they conclude.
Reporting by Christopher Spink