On 2 November 2017, Venezuelan President Nicolás Maduro announced a “restructuring and refinancing” of Venezuela’s foreign debt obligations which could prove to be among the most complicated and challenging restructurings in recent years, if not ever. In that same announcement, Maduro placed the blame and the need for such a restructuring on the “global financial persecution” that he claims Venezuela has faced in the form of heightened sanctions from the Trump administration, including sanctions on the government official Maduro tasked with leading the negotiations, Vice President Tareck El Aissami. In this report, the Debtwire legal analyst team breaks down Maduro’s restructuring team, Venezuela’s foreign debt obligations, US sanctions that have been imposed and analyzes Venezuela’s prospects for a meaningful restructuring in the face of these obstacles.
A complicated endeavor
The restructuring of Venezuela’s foreign debt obligations would be a complex undertaking in any circumstance given the amount and diversity of its liabilities and the unprecedented economic and financial crisis that the country is facing. But when combined with tough financial sanctions from the US, which effectively bar US creditors from negotiating with the government or refinancing their obligations, a meaningful restructuring seems all but out of reach. Further, the fact that the Venezuelan government has yet to announce a restructuring plan or even the framework of a plan (or really anything in the way of details) leads to more questions than answers, and specifically begs the question of whether a sustainable restructuring of Venezuela’s foreign debt obligations is even possible. Given the lack of details and the complexities of the situation, it is helpful to take a step back and try to answer five basic questions about the situation – Who? What? When? Where? Why? – in an effort to understand how a restructuring and refinancing would be effectuated under the current circumstances.
Who are the members of Maduro’s restructuring team?
Maduro has created the Presidential Commission for Debt Renegotiation to oversee the restructuring. The commission is led by Vice President Tareck El Aissami, which is an interesting choice considering the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated El Aissami in February 2017 as a “Specially Designated Narcotics Trafficker” pursuant to the Foreign Narcotics Kingpin Designation Act, prohibiting US persons from engaging in transactions or otherwise dealing with him in any way. The US government describes El Aissami as follows:
El Aissami was appointed Executive Vice President of Venezuela in January 2017. He previously served as Governor of Venezuela’s Aragua state from 2012 to 2017, as well as Venezuela’s Minister of Interior and Justice starting in 2008. He facilitated shipments of narcotics from Venezuela, to include control over planes that leave from a Venezuelan air base, as well as control of drug routes through the ports in Venezuela. In his previous positions, he oversaw or partially owned narcotics shipments of over 1,000 kilograms from Venezuela on multiple occasions, including those with the final destinations of Mexico and the United States.
He also facilitated, coordinated, and protected other narcotics traffickers operating in Venezuela. Specifically, El Aissami received payment for the facilitation of drug shipments belonging to Venezuelan drug kingpin Walid Makled Garcia. El Aissami also is linked to coordinating drug shipments to Los Zetas, a violent Mexican drug cartel, as well as providing protection to Colombian drug lord Daniel Barrera and Venezuelan drug trafficker Hermagoras Gonzalez Polanco.
One of the six other members of the commission, Simon Zerpa, the Venezuelan economy minister, joins El Aissami (and Maduro) on the US government’s sanctioned list. Potential sanctions on US citizens for violating the Kingpin Act include up to 30 years in jail and fines of up to USD 5m.
The government is also being advised by a team of “top lawyers” that have purportedly been working on a restructuring plan for several months. That team is said to include David Syed, a lawyer specializing in debt restructuring processes, and a team of lawyers from Dentons.
State-owned oil company Petróleos de Venezuela (PdVSA) has awarded a provisional mandate to Hogan Lovells.
What external obligations are being restructured?
The Venezuelan government has not yet announced which of its vast foreign debt obligations, amounting to more than USD 150bn, are subject to the proposed restructuring and refinancing. These obligations include:
- New York law governed bonds and promissory notes;
- Multilateral loans;
- Bilateral loans owed to China, Russia and Brazil;
- Commercial loans;
- Liabilities in connection with arbitration under the World Bank’s International Centre for Settlement of Investment Disputes (ICSID); and
- Other external liabilities including accounts payable, trade credits, arrears and other liabilities.
Venezuela could choose to target only sovereign debt for restructuring and refinancing and not that of state-owned oil company PdVSA. This would be in line with the government’s declaration that it would make a final payment of USD 1.1bn on PdVSA’s 2017 bonds that matured on 2 November at the same time as it made its restructuring announcement. As discussed below, the sovereign bonds present less attachment risk due to PdVSA’s ownership of valuable oil assets. The sovereign bonds may also be easier to restructure in the face of US sanctions, also discussed below.
It is also unclear whether the holders of non-debt claims such as ICSID arbitration debt holders will be invited to participate in the restructuring negotiations.
When will Venezuela run out of funds to service its debt?
The answer to this question is unknown but all indications point to soon.
To date, Venezuela has continued to make its debt service payments. President Maduro underscored his country’s commitment to remaining current on its debt by declaring that Venezuela will never default and will always have a clear strategy in place, although exactly what that strategy is right now is anything but clear. Further, most agree that Venezuela’s policy of full and (sort of) timely external debt service cannot be sustained much longer.
Indeed, what has been happening in recent weeks may suggest a shift in policy. First, the government has been taking advantage of the 30-day grace periods for all coupon payments (amortizations do not have such a grace period). Second, although scheduled debt service payments have been made, the funds have arrived up to a week late and neither the government nor PdVSA have given a clear explanation for the payment delays. The delays may have simply been the result of processing obstacles caused by US sanctions or could be caused by the government’s difficulties trying to scrape together funds to make these payments. Regardless, the delays led Standard & Poor’s and Fitch to place both issuers in default. ISDA also declared failure to pay events for PdVSA and for Venezuela, with CDS auction details expected 27 November.
Below is a table of Venezuela and PdVSA’s principal and interest payments coming due in the next year:
Venezuela faces major principal payments in 2018, including a USD 650m maturity payment for the bonds of state-owned electricity company, Elecar, due April 2018, as well as large coupon payments due throughout the year.
Where are debt holders located?
Any effort to consummate a restructuring is complicated by financial sanctions imposed by the US government which, in effect, prohibit US citizens or corporations from engaging in any type of restructuring or refinancing transaction with the government of Venezuela or PdVSA. These sanctions were imposed by executive order of US President Donald Trump on 24 August 2017. A FAQ regarding the necessity of the sanctions explained that:
The Government of Venezuela is selling assets for much less than they are worth at the expense of the Venezuelan people and using proceeds from these sales to enrich supporters of the regime. Bonds and other securities are among the assets being sold. The prohibitions and related general licenses are meant to prevent U.S. persons from contributing to the Government of Venezuela’s corrupt and shortsighted financing schemes while mitigating market disruptions and harm to investors.
The sanctions prohibit US persons from engaging in transactions relating to:
- New PdVSA debt with a maturity of greater than 90 days;
- New equity or debt of the Government of Venezuela with a maturity of greater than 30 days;
- Bonds issued by the Government of Venezuela prior to 25 August 2017;
- Dividend payments or other distributions or profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela;
- Purchasing securities from the Government of Venezuela (subject to caveats above); and
- Any transaction that evades or avoids or violates the prohibited activities.
To mitigate harm to the American and Venezuelan people, the Treasury Department issued general licenses that allow for transactions that would otherwise be prohibited by the executive order. These include:
- Transactions where the only Government of Venezuela entities involved are CITGO Holding and its subsidiaries, including valuable CITGO Petroleum Corporation (General License 2);
- Dealings in select existing Venezuelan debts (General License 3); and
- Financing for humanitarian goods to Venezuela (General License 4).
The White House press secretary asserts that
These measures are carefully calibrated to deny the Maduro dictatorship a critical source of financing to maintain its illegitimate rule, protect the United States financial system from complicity in Venezuela’s corruption and in the impoverishment of the Venezuelan people, and allow for humanitarian assistance.
The number of US-based Venezuelan and PdVSA debt holders is not known, however, it is thought to be substantial. With penalties including jail time and millions of dollars in fines, it is unlikely that a US company will choose to engage in restructuring negotiations in the face of US sanctions. We may see investors selling their holdings to a party that is willing and able to negotiate with Venezuela. Distressed investors may also see this as an opportunity and start buying up sovereign and PdVSA bonds.
Why is a restructuring and refinancing necessary?
The circumstances surrounding Venezuela’s political and financial crisis have been detailed extensively in the media. Suffice it to say, the country is on the verge of economic and social collapse and is faced with unsustainable external debt obligations. Further, absent a restructuring and refinancing, a default leaves the country’s most valuable assets – CITGO and money from the export of petroleum – vulnerable to seizure by creditors.
In particular, a default under any PdVSA debt larger than USD 100m risks a cross-default under PdVSA’s secured 2020 bonds. PdVSA’s wholly owned US subsidiary, PDV Holding, pledged 51% of its interest in CITGO Holding, the parent of valuable CITGO Petroleum, to the collateral agent for the bonds. The remaining 49% was pledged to Rosneft, an oil company majority-owned by the Russian government, in connection with a 2016 financing arrangement for PdVSA. Thus, a payment default greater than USD 100m allows bondholders to exercise remedies against PDV Holding’s CITGO Holding shares.
A default under Venezuela’s sovereign debt obligations may leave CITGO vulnerable to similar enforcement actions. ICSID arbitration creditor, Crystallex International Corporation, is paving the way in this regard. The Debtwire legal analyst team previously provided an in-depth analysis of this situation. To summarize, in April 2016, an ICSID arbitration panel awarded Crystallex a judgment of USD 1.2bn against Venezuela for expropriating its interest in Venezuelan gold mines. After the government failed to pay the award, Crystallex commenced various proceedings in the US courts seeking to attach Venezuelan assets located in the US in an attempt to satisfy the award. Crystallex also sought to attach PdVSA’s shares in PDV Holding by arguing that PdVSA is the alter ego of Venezuela. Venezuela argued that the two entities are separate and that its assets are protected from attachment by the Foreign Sovereign Immunities Act.
The action is still pending and will no doubt be closely watched by other ICSID arbitration creditors and sovereign debtholders. Crystallex’s efforts also underscore PdVSA’s need to safeguard its assets from an enforcement action in the US and minimize the impact of any defaults.
How will a restructuring be implemented?
Now that the basic questions have been answered, or at least outlined, we come to the most important and complex question, how will a restructuring and refinancing be effectuated in the face of US sanctions? Thus far, Venezuela’s strategy has been long on rhetoric and short on details. The government indicated that it would provide such details at a 13 November meeting of creditors, but this was not the case. At the 10-minute meeting, which, not surprisingly, was sparsely attended by foreign creditors given the severe penalties for violating US sanctions, Vice President El Aissami reportedly spent the majority of the time talking about the Trump administration’s “illegal” sanctions. He did ask creditors to “help” the government restructure its debt and discussed forming “working groups” to discuss the country’s debt. A group of Venezuela and PdVSA bondholders, were scheduled to hold an investor-led meeting on 30 November to discuss the restructuring.
A possibility that may be discussed at this meeting is utilizing the collective action clauses or CACs in Venezuela’s sovereign bonds as a means around US financial sanctions. Most sovereign bonds contain CACs that permit a super-majority of 75% or 85% of holders to amend the terms of the bonds which will be binding on dissenting holders. However, getting to the 75% or 85% threshold will be challenging. In a normal restructuring getting even a majority to agree can be difficult and will be especially difficult here given that US entities are not permitted to participate in any restructuring transaction and may hold enough bonds to block the amendments for a particular series.
Another possibility is for Venezuela to look to Russia and China, which have considerably more friendly relationships with the government than the US. Indeed, Venezuela recently reached an agreement with Russia to restructure Venezuela’s USD 3bn of debt. Maduro also announced that commitments with China, which are also significant, are moving along perfectly. In addition to actively engaging in a restructuring and refinancing, Venezuela may look to Russia and China for an emergency cash infusion.
Alternatively, Venezuela and PdVSA may also choose to avail themselves of the bankruptcy process. This would likely require Venezuela to implement a new insolvency law similar to what the US government did for Puerto Rico with the Public Corporations Debt Enforcement and Recovery Act, which would provide for a stable and orderly restructuring and at the same time allow the country to provide crucial services to its citizens. The US State Department describes Venezuela’s current bankruptcy laws as “outdated and inadequate to permit the reorganization of a debtor as a going concern.”
In a bankruptcy scenario, Venezuela may put PdVSA in an insolvency proceeding in Venezuela, default on its bond debt and seek recognition in the US through a concurrent Chapter 15 filing to protect its US assets from creditors via the automatic stay. A big issue here will be persuading a US bankruptcy court to recognize the Venezuelan insolvency proceeding and give it legal effect. This is unlikely under Venezuela’s current bankruptcy laws and, even if a new insolvency law is implemented, may still not be recognized. Bankruptcy Code section 1506 allows a bankruptcy judge to refuse to take any action governed by Chapter 15 “if the action would be manifestly contrary to the public policy of the United States.” Given the current US sanctions and the absence of a complete government or policy overhaul, a judge may find that the recognition of a Venezuelan proceeding and the enforcement of its orders are against public policy.
PdVSA, through its US subsidiary, PDV Holding, may also find itself forced to utilize the US bankruptcy law if creditors such as Crystallex are successful in foreclosing on its US assets. This would likely be a last resort though given the risk of clawback actions in a bankruptcy that may arise from, among other things, questionable dividend and other payments made to PdVSA, exposing the company to further litigation and unwanted discovery.
In sum, there appear to be few viable options available for this touted restructuring. Even if US sanctions are lifted, a refinancing and restructuring of Venezuela’s debt obligations will be enormously complicated and involve a diverse group of creditors with diverging interests from across the world. Further, to the extent Venezuela and its restructuring team are able to come up with a refinancing plan around US sanctions, one major hurdle stands in the way in the form of tougher sanctions likely to come from the US government in an attempt to block any plan that is proposed.
by Sarah Foss
Sarah Foss is a former practicing restructuring attorney. Prior to joining Debtwire as a Legal Analyst, Sarah practiced in the New York and Houston offices of Winston & Strawn LLP and Dewey & LeBoeuf LLP in the area of business reorganizations, including complex Chapter 11 cases and out-of-court restructurings. She has represented large corporate debtors, creditors’ committees, secured lenders, distressed asset acquirers and investment banks across a broad range of industries.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.
 The other members of the Committee include vice-minister Wilmar Castro Soltedo, vice-president of planning Ricardo Menendez, oil minister Eulogio Del Pino, Attorney General Reinaldo Munoz, and PdVSA President Nelson Martinez.
 Syed was a partner at Orrick, Herrington & Sutcliffe but reportedly left the firm after it declined to work with Venezuela’s officials.
 Debtwire reported that the law firm Squire Patton Boggs sent a group of lawyers to Venezuela last week but it is unclear what their role in the restructuring will be.
 The term ‘‘United States person’’ means any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person [individual or entity] in the United States.
 The term ‘‘Government of Venezuela’’ means the Government of Venezuela, any political subdivision, agency, or instrumentality thereof, including the Central Bank of Venezuela and PdVSA, and any person owned or controlled by, or acting for or on behalf of, the Government of Venezuela.
 PdVSA bonds do not have CAC clauses and require unanimous consent to amend most key terms.