Venezuela sovereign-first refi more likely given collective action clauses, attachment risk

06 November 2017

Venezuela (Caa3/C/CC) could choose to target only sovereign debt for restructuring or refinancing, and not that at Petroleos de Venezuela (PdVSA), according to a sovereign analyst, a lawyer and two other sources familiar with the matter. The sovereign bonds represent less attachment risk due to state-owned oil company PdVSA’s ownership of oil assets, and amending the sovereign bonds’ collective action clauses (CACs) could be a means around US financial sanctions, these four sources said.

 

President Nicolas Maduro announced last week that the government would “restructure” its foreign debt, without giving any details about how this might be done, as reported. Any effort to address bondholders would be complicated by US financial sanctions prohibiting dealings in new debt and equity issued by the country's government or PdVSA, dealings in certain existing bonds owned by the Venezuelan public sector, and dividend payments to the government.

 

The CACs in select Venezuela bonds would allow for amendment of terms on existing sovereign liabilities, and could offer a loophole, the four sources said. Venezuela’s sovereign bonds mostly contain CACs – the exceptions are the 9.25% 2027s and two separate tranches of USD 13.625% 2018s. PdVSA bonds, on the other hand, don’t have CACs.

 

“Venezuela could say we will not exchange anything or take a new bond, but we will amend the existing bonds by using the collective action clauses,” the first source familiar said. However, if Venezuela takes advantage of this loophole, it still faces the risk that the US government could try to block the transaction, perhaps by expanding the sanctions, this source noted.

 

Venezuela also faces a very high threshold for amending CACs, according to the lawyer. Approval of 85% is required on two series of Venezuela bonds and 75% on the remaining 12 series, the lawyer said. There is also no aggregation clause that would allow for several series to be voted on together. There is always the threat of holdouts working together to get a blocking position, the lawyer added.

 

Still, addressing the sovereign debt before PdVSA’s would make sense, the lawyer said, as the republic is protected from attachments, whereas PdVSA is a business and attachments and litigation would be disruptive, the lawyer said.

 

People at PdVSA claim the company debt is not part of Maduro’s announcement and that the sovereign will try to pursue a “very friendly reprofiling of the republic bonds,” the second source familiar said. This would likely include International Centre for Settlement of Investment Disputes (ICSID) claims in addition to the sovereign bonds.

 

“We consider a political regime change in Venezuela or a lift of the US sanctions necessary conditions for a restructuring,” Victor Fu, EM sovereign strategist at Stifel Nicolaus, told Debtwire. “Maduro probably is using the US sanctions as an excuse for not paying foreign debt and instead intends to use the saved hard currency resources to prop up Chavistas heading to next year's presidential election.”

 

Venezuela could also try to refinance its debt while still complying with the US sanctions by issuing new liabilities whose proceeds are earmarked for imports of food and medicines or attempting to issue a bond directed at non-US investors, Torino Capital wrote in a report.

 

Market confusion ahead of Caracas meeting, focus on Elecar payment

 

Confusion regarding Maduro’s announcement led to a massive selloff across the Venezuela and PdVSA bond curve, despite the government’s continued willingness to pay and no technical default to date. PdVSA’s 8.5% 2020 bond is at 75.00 this afternoon, down 10 points from the 85.00 last Wednesday, according to MarketAxess.

 

Venezuela Vice President Tareck El Aissami will head the “refinancing and restructuring” of Venezuela’s foreign debt (Venezuela and PdVSA), and bondholders were invited to Caracas for a key bondholder meeting on 13 November, as reported. Venezuela and PdVSA have about USD 126.9bn in debt outstanding, according to BancTrust.

 

Major principal payments next year include the USD 650m Elecar payment due April 2018, a USD 842m PdVSA payment due October 2018 and sovereign payments of USD 1bn in December 2018 and USD 1.05bn in August 2018.

 

There was still no official word as of Monday afternoon regarding the interest payments for several Venezuela, PdVSA and Electricidad de Caracas bonds. The first of the 30-day grace periods, for the Elecar 8.5% 2018 bond, expires Friday 10 November. There is no cross-default clause on this bond.

 

“We expect a payment and I do not see a select default because it would have bad implications for the country and bondholders would accelerate,” Lutz Roehmeyer, a portfolio manager at German-based Landesbank Berlin Investment told Debtwire. “Elecar bonds are not widely distributed and consist of a small club of holders, and we have the 25% to declare legal action.”

 

Elecar bondholders were approached by funds looking to create bondholder groups approximately two months ago, Roehmeyer said. Non-payment of the state-owned electricity company’s interest bond payment this Friday would underscore the country’s cash shortage and send shockwaves throughout the market regarding the country’s ability to service its debt, he said.
 

by Mariana Santibanez