MIAMI/NEW YORK, Jan 21 (IFR) - The lack of collective action clauses on close to US$40bn of Venezuelan bonds could expose the oil exporting nation to a lengthy legal fight with holdout investors if plunging oil prices force the government to default on its debt.
With crude hovering around US$29 per barrel on Thursday, Venezuela - which has requested an emergency OPEC meeting - could have trouble satisfying its debt obligations.
Barclays said the country will have difficulty avoiding a credit event in 2016 - and that is based on the bank’s forecast of US$37 oil, almost US$10 higher than current prices.
If that happens, analysts said hedge funds could look to borrow a page from Argentina’s play book and try to exploit the absence of collective action clauses on some sovereign debt to block a potential restructuring and sue for full repayment.
“The fact that some bonds don’t have collective action clauses is a problem,” said Lee Buchheit, a partner at law firm Cleary Gottlieb who has advised sovereigns from Greece to Iraq on sovereign debt matters.
“Venezuela has more commercial connections with the US than most sovereigns do and that increases the litigation risk. They should be concerned about a debt restructuring that left behind holdouts.”
Buchheit was recently hired by Argentina’s new government as the country reopens negotiations with holdout investors.
Collective action clauses typically spell out that any restructuring can go ahead with a 75% approval from investors, binding any dissenting creditors in the process.
The lack of these clauses could stagger the restructuring process and cause delays that in the case of Argentina led to the country’s 15-year isolation from the capital markets.
Venezuelan bonds without CACs include all of the US$35.6bn in dollar debt issued by state-owned oil company PDVSA as well as two series of Venezuela’s own debt - about US$4bn of 9.25% September 2027s and US$300m of 13.625% August 2018s.
“The 2027s are going to be the most valuable in the event of a default,” said Russ Dallen, a partner at Latinvest in Miami, who argued those notes’ large size and liquidity could make them easy prey for hedge funds.
Two other bonds issued by the sovereign - the 7% December 2018s and the 9.375% January 2034s - have CACs, but require a higher threshold of 85% for a restructuring to go ahead, potentially making it harder for an agreement among creditors to be reached.
An Argentina-style protracted legal fight in the US - where Venezuela owns refiner Citgo and sells a large portion of its oil exports - is seen by several analysts as the main risk facing bondholders in a post-default scenario.
“My fear in Venezuela is not the default,” Siobhan Morden, head of Latin America fixed-income strategy at Nomura said at a conference of the Emerging Markets Trading Association in Miami this week.
“The concern is an extended period, similar to Argentina in 2001, where you hit a low in terms of recovery value ... but you don’t know when debt negotiations are going to start.”
Inaction from the Venezuelan government, which faces major domestic issues at home including triple-digit inflation and shortages of basic goods, could also hinder negotiations with creditors.
“Countries sometimes do become preoccupied with their internal political issues and they don’t get around dealing with external debt problem until it becomes messy,” said Buchheit. (Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Shankar Ramakrishnan)