Venezuela is facing not only a grave humanitarian crisis, but an acute financial and economic one as well–including a massive debt burden. Moreover, Venezuela is in the throes of an extended political stalemate between the forces aligned with the regime of Nicolás Maduro and those led by opposition leader and so-called “interim” Venezuelan president Juan Guaidó. However, as long as the Maduro regime remains in power, it seems unlikely that Venezuela will be able to negotiate a restructuring deal with its foreign creditors, due in no small part to certain restrictions provided for in the current U.S. sanctions regime vis-à-vis Venezuela, such as the inability of U.S. “persons” to negotiate with designated individuals in the Maduro regime.
Nonetheless, if and when a new government eventually comes to power in Venezuela, it will almost certainly face formidable challenges in negotiating a sovereign debt restructuring with its creditors and rebuilding a national economy. Any debt restructuring will be complicated by a number of factors. First, there is a very large pool of creditors, and this could make creditor coordination very difficult. Second, the fact that a Venezuelan debt restructuring would involve two major obligors—the Republic of Venezuela and its state-owned oil company, PDVSA—makes the situation more complex than the usual sovereign debt restructuring, where there is typically only one major obligor involved, namely the national government in question. Third, the sheer diversity of the Republic and PDVSA creditors—which include bondholders, trade creditors and suppliers, arbitration award holders, promissory noteholders, and holders of rights to payments blocked by the Venezuelan government (e.g., foreign airlines)—could give rise to serious intercreditor disputes.
Fourth, the presence of China and Russia as so-called bilateral (or government) creditors to Venezuela means in a restructuring context that, unlike normal commercial creditors, they may not be driven by strictly financial considerations but instead may be influenced by other factors such as geopolitical considerations revolving around Venezuela’s strategic location in the “backyard” of the United States. In that sense, Russia and China could effectively end up being “wild cards” in any eventual Venezuelan restructuring. Finally, the fact that the Venezuelan economy has virtually collapsed in recent years and that there is much active litigation against both the Republic and PDVSA could ultimately lead to a smaller pool of resources being available to support any eventual Venezuelan debt restructuring, and this could have the effect of making such a restructuring even more difficult.
For these and other reasons, a Venezuelan debt restructuring may be messier than any recent sovereign debt restructuring. In a new article, “Venezuela: Prospects for Restructuring Sovereign Debt and Rebuilding a National Economy Against the Backdrop of a Failing State,” I explore the challenges associated with any eventual Venezuelan debt restructuring and any future national economic reconstruction effort.
On the debt restructuring front, a new government in Venezuela may need to employ some of the standard restructuring techniques (e.g., debt forgiveness, debt reschedulings, etc.) as well as some fairly unconventional tools and techniques. For example, a new government might wish to consider offering creditors debt-for-equity swaps whereby creditors might exchange their outstanding Venezuelan debt for rights to develop natural resources that Venezuela has in abundance, such as oil and other minerals. However, even if Venezuela were to use previously employed techniques such as the relatively straightforward debt-for-equity swaps used in the Latin American debt crisis of the 1980s (where debt was exchanged for shares in newly privatized companies), it would need to adapt and update them to take into account new realities in today’s Venezuela, including the fact that the Venezuelan national currency (which was used to purchase the equity in the 1980s-style debt-for-equity swaps in Venezuela) has become virtually worthless in today’s Venezuela as a result of rampant hyperinflation in recent years.
A new Venezuelan government might also wish to consider whether to challenge the validity of certain prior debt obligations incurred by the Republic or PDVSA. Such challenges might arise, for instance, if the debt obligations were incurred by fraud or corruption or if the debt obligations raised issues of “odious debt,” i.e., debt that was not considered legitimate because, among other things, it was not incurred for the benefit of the Venezuelan people.
On the economic reconstruction side, a new Venezuelan government will need to consider how to rebuild its seriously degraded and dysfunctional oil industry (where oil production is just a fraction of what it was just a few short years ago) and how it can diversify its economy into non-hydrocarbon sectors (particularly in view of Venezuela’s overreliance on the oil industry as the central pillar of its economy and its national finances). Further, a new Venezuelan government will almost certainly want to consider how to recapture the billions of dollars of assets that have allegedly been diverted from the national coffers of Venezuela into the pockets of government officials and other individuals connected to the ruling regime.
In designing a program for rebuilding the Venezuelan economy, policymakers will need to address a wide range of other important legal and policy matters relating, among things, to the possible privatization of Venezuelan state-owned enterprises and the role of foreign investors in restarting the economy. It will also need to consider what changes need to be made to its hydrocarbon law and laws affecting foreign investment generally and whether, as part of an effort to attract potential foreign investment, it is prepared to rejoin international conventions such as the ICSID Convention which provides for investor-state arbitration under the auspices of the World Bank-affiliated body, the International Centre for Settlement of Investment Disputes (ICSID). Venezuela, under the Chavez regime, withdrew from the ICSID Convention in 2012. Steps such as rejoining the ICSID Convention could be crucial in providing the necessary comfort to potential foreign investors in Venezuela, especially in light of the major widespread expropriations of foreign investments that took place under the Chavez regime. A new government will also want to be mindful of whether the measures it is proposing will enjoy the popular support of the Venezuelan people.
This post comes to us from Steven T. Kargman, president of Kargman Associates/International Restructuring Advisors. It is based on his recent article, “Venezuela: Prospects for Restructuring Sovereign Debt and Rebuilding a National Economy Against the Backdrop of a Failing State,” recently published in the AIRA Journal (the journal of the Association of Insolvency & Restructuring Advisors) and available here.