Argentina's Curse, Venezuela's Blessing: How to Restructure Venezuela's Debt Using Pari Passu

Abstract

Given the depth of Venezuela’s economic crisis, many fear that the government and the state-owned oil company Petroleos de Venezuela, S.A. (“PDVSA”) are on the brink of insolvency. In this paper, we introduce a restructuring plan that would allow Venezuela to restructure its external debt in an orderly manner. We propose that Venezuela restructure both PDVSA debt and its own external debt via Exchange Offers. To maximize the number of participating bondholders and receive sufficient debt relief, we suggest that Venezuela primarily utilize the pari passu clauses in the vast majority of PDVSA and Venezuelan bonds, which have been modified compared to a typical pari passu clause and can be read to allow the subordination of the bonds according to Venezuelan law. To minimize the number of holdout creditors, therefore, Venezuela can introduce a law that subordinates non-exchanged debt to exchanged debt, making timely or full payment of holdout debt unlikely. This tactic would minimize the need to solely rely on alternative restructuring techniques, such as exit consents and Collective Action Clauses. We argue that while these techniques might in and of themselves prove insufficient to effectuate a successful restructuring, they could be useful when viewed as second-best restructuring options. Because the parties contracted for debt subordination in the bond contracts, we predict that using a debt subordination technique would be more viable in Venezuela’s case than it has been in past sovereign debt restructurings. Ironically, the pari passu clause that doomed Argentina might be what saves Venezuela.