Having just wrapped up Season 2 of Stranger Things this week, I just couldn’t help draw the connection between the Mind Flayer and its army of Demogorgons wreaking havoc in Hawking, Indiana and Venezuelan President Nicolas Maduro and his finance ministers terrorizing global capital markets in Caracas, Venezuela.
While the former makes for good entertainment, the latter makes for one of the biggest sovereign defaults in history.
Venezuela in Default: What Now?
With an estimated $142 billion in debt outstanding and only $9.68 billion in reserves, things do not look well for Venezuela.
The top institutional holders of Venezuelan debt — bonds sold by both the government and state-owned oil company PDVSA include Wall Street’s biggest firms.
Here, take a look:
Creditors Have 3 Options
As the Wall Street Journal’s emerging markets and soft commodities reporter, Julie Wernau writes in the article Debt Crisis in Venezuela: What’s Next?, creditors have 3 options: do nothing, push for full payment, or negotiate.
- Do Nothing
Creditors can opt to do nothing and hope they get paid before other bondholders. While Venezuela has said it will continue to pay, this approach is risky because there is no certainty if and when creditors will be paid.
In the meantime, bondholders taking a more aggressive approach may wield what leverage they have to exact more favorable terms from the regime.
- Push for Full Payment
Creditors can also opt to push for full payment. This might include; a) triggering credit default swap payouts;b) accelerating bond payments or; c) litigating.
a. Trigger CDS Payout—The International Swaps and Derivatives Association (ISDA) committee’s unanimous decision that the payment delays constitute a “credit event” is positive news for creditors.
A credit event is what triggers credit default swaps (a form of insurance on corporate and sovereign debt) that would pay out to investors.
This could be a good option but the payout is limited.
b. Accelerate Bond Payments—An acceleration occurs when a group of aggrieved creditors demand immediate repayment of their bonds.
However, this does not look like a viable option.
Venezuela lacks the ability to pay the full principal back at once.
Also, from a practical standpoint, acceleration would only result in restructuring talks (probably unsuccessful) with the government or international lawsuits (likely).
c. Lawsuits Against Venezuela and Asset Seizure–Venezuela’s creditors could go nuclear and seize assets instead of payment, including the country’s prized commodity: oil.
Among the most valuable assets are state-owned oil refiner Citgo Holdings Inc., shares of which were pledged to bondholders and Russian oil producer Rosneft in exchange for loans.
Judgment creditors will have the opportunity to seek out assets and pursue recognition of judgments in in other countries—not just the U.S.
Bank accounts, receivables (including oil receivables), and equity in subsidiaries organized outside of Venezuela may become subject to being seized.
Anyone remember Elliot Management’s seizure of an Argentine Navy ship, ARA Libertad, in 2012?
Wait, what about sovereign immunity?
While the FSIA provides that a foreign government is generally immune from suit in U.S. court.
However, Venezuela explicitly waived its immunity in connection with the bonds currently at issue and agreed that disputed issues would be resolved in accordance with New York law or through arbitration.
- Negotiate to Restructure Outstanding Debt
This strategy may have had a better chance if Venezuela had not burned bridges with the International Monetary Fund.
With the IMF’s help, it could have avoided default with some diligent management and external support.
The United States’ sanctions against Venezuela is a major factor militating against successful negotiation of the debt.
These recently imposed sanctions prohibit U.S. persons from transacting in, providing financing for, or otherwise dealing in “new debt” (i.e., debt issued after August 24, 2017) of longer than 30 days maturity with the government of Venezuela or any of its related subdivisions.
There are also valid arguments for why other governments are unlikely to help Venezuela.
It remains to be seen which option is the best for creditors to choose.
While hoping for the best and negotiation are strategies that may have worked under different circumstances, given Venezuela’s animus towards the rule of law, pushing for full payment is looking like the only choice creditors have.
Unless, of course, Eleven can lend a hand.
For those of you interested in seeing what a Venezuelan Bond Listing Memorandum looks like, I’ve included a sample below: