Expert Analysis: Creditors Are Cracking Down On Venezuela

Venezuela skipped payments on around $50 billion in debt beginning last year. With little cash left, and a mountain of debt, combined with an economic crisis and oil production in a downward spiral, the situation is dire. Creditors could begin swarming over the country, hoping to claim compensation one way or another on defaulted debt obligations. The process is complicated and uncertain. Oilprice decided to check in with Jay Auslander, an attorney and partner at Wilk Auslander, on what we can expect over the debt crisis. Jay is recognized for his work in judgment enforcement and distressed debt litigation.

Oilprice.com: Venezuela has already defaulted on interest payments on some $50 billion dollars in debt and Reuters reported recently that some creditors are holding meetings to form committees, presumably to coordinate their action and next steps on what to do regarding those missed two payments. So, I guess I was wondering, what are the next steps that creditors can take and what does that mean for Venezuela's oil production? Can creditors go after the shipments? How does that work?

Jay Auslander: Okay, so there's a lot that goes into that answer, so I'll try to break it down so that it's manageable. Obviously they are different creditors that are going to have different strategies that fit the strategy of their own portfolios, their interests, and their own relationships with other creditors. Creditors have a number of different avenues available.

Some creditors can sit back and wait. For one thing we have an election coming up on May 20th. Even though the opposition candidate is more popular, I think there is tremendous skepticism that Maduro is not going to win that election, but it's coming.

And they may say “let's just sit back and wait, Venezuela is enormously complicated, we can't really restructure because of U.S. sanctions, we can't get new bonds, and there's going to be this mad rush on whatever assets there may be outside the country, primarily oil, Citgo related-assets, PDVSA-related assets…Let's not do anything.”

And that's one approach that people can take, is to sit back and wait, particularly because of the magnitude and complexity of this.

However, as you pointed out, we are now tens of billions of dollars in debt and with Venezuela, you know, the thinking is they've got roughly $150 billion in debt and $9 billion in reserves…that's not a pretty picture.

The other thing that creditors can do is they can declare defaults. The way it would typically happen is that you need a certain number of bondholders to act together, it's very common that that is the way these things work.

And now we're going to have a sort of cascade of creditors. And what they can do is accelerate…declare defaults, accelerate the debts, and get judgements…because before you do anything else you need to get judgements.

Now, there are certain kinds of asset seizures that you can do prejudgment, but you're going to certainly want to go ahead and get judgement. And getting judgements on notes tends to be…obviously creditors can drag that out and raise all kinds of issues, especially when it's a sovereign. They always do, you're probably familiar with, for example, Argentina. But Argentina was easy compared to this.

And then what creditors can do...creditors can then go ahead and pursue assets. In this instance, in the case of Venezuela, there's going to be all kinds of arguments, that for example, that some of the assets of PDVSA have been pledged as collateral for government debt, and vice versa. And there's been arguments that that's nonsense.

And you are going to see all kinds of fights from creditors about who has priority, where the certain security interests are valid, whether they're not valid.

In its most basic form, what creditors are going to be looking to do is to grab whatever assets they can that are outside the country. Obviously, when you're looking at Venezuela, you're looking at oil.

And claiming that either, if they are creditors of the government, that PDVSA is really an instrumentality of the government and not a separate entity...that it really is the same thing as the government and so the debt of the government should be enforceable against the assets of PDVSA.

Obviously, there are going to be some arguments about that because if it's really an arm of the government then it should get sovereign immunity and it's not purely commercial. As it's used right now it's the only thing that’s feeding people there. And it’s funding the government. And you're going to see a lot of debate about that.

So, what you could end up with is this cascade of creditors vying over different positions seeing who comes first while pursuing the assets that are outside of the country. And what makes this particularly problematic, again, is that you can't do a typical restructuring because under the current sanctions rules you can't go ahead and do a restructuring and get what you would typically do, which is exchange old bonds for new bonds.

There has been some discussion by the Trump Administration that to the extent that the National Assembly – in other words the party that Maduro has essentially neutered – that to the extent that they approve a restructuring then it is possible that the United States would go ahead and support it. But that's anyone’s guess. And, again, right now, it looks like Maduro's hold is pretty tight.

And there's another thing too. You may end up with certain arguments, certainly arguments made by Venezuela, that debt that came into play post-2016 is unconstitutional according to Venezuela and is not a real debt.

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So, all of these things make Venezuela a very different kind of enforcement and sovereign debt problem than I think anybody has ever really encountered before. It is certainly more complicated.

It's extraordinary complicated. And I'm sure you saw, Nick, look what happened when Goldman Sachs actually got paid. Look at the uproar. What were they called, “suffer bonds” or “hunger bonds?” It's pretty bad.

OP: I saw that PDVSA recently made interest payments, and maybe it was those, and press reports suggested that they made those payments perhaps because Citgo was used as collateral for them and that was an asset that PDVSA did not want to risk getting seized. What do you make of that?

JA: Well, I think the government certainly has to be concerned that PDVSA assets are going to be seized because that anything that impacts PDVSA is going to be extremely problematic. PDVSA is in serious decline, right? It can't reinvest in itself. Its facilities are falling apart. It lost, I forget what the number of workers was last year, what was it? 20,000 or 30,000?

OP: Yeah, tens of thousands.

JA: Yeah, I mean tens of thousands of workers are walking off because they're not being paid enough and it's a dangerous job. They can't process the crude that they have. So, obviously, I think the government is going to be extremely cautious when it comes to anything that has to do with PDVSA.

And you also have another problem too. So many funds don't want to touch these bonds, right? Because if you take them you don't know what the risk is. If you actually get paid on them you risk this sort of public [outcry] that you're taking this money. So it becomes a particularly difficult problem.

OP: So, then how do creditors get paid then?

JA: Yeah. I think what you see is that reticence. I think that's what we're seeing so far, is that reticence. But ultimately, creditors have an obligation. And they have a fiduciary obligation to be sure that they get paid. It's always a touchy subject because the suffering in Venezuela is so horrific.

And that is, of course, the government's doing. There's not going to be any easy answer to that. I think ultimately creditors, to the extent that these defaults continue to mount, are going to say that they don't have a choice. They are going to act together and say “look, we bought these bonds, we bought these instruments, we put the money in and we are entitled to get that money. And we want that money.” And they're going to go ahead and do it. And, ultimately I think you are going to see numerous enforcement efforts. Whether or not that ultimately leads to a turn in what happens in Venezuela because things become so difficult…

Let's look for, example, at Argentina. For years you had Cristina essentially pushing back against Judge Griesa, pushing back against U.S. capital markets and saying...and it was a populist position, right? Saying that “we are not going to kowtow to this. We're not paying, we're not paying, we're not paying.” Until ultimately as Argentina continued to get hurt by that a new government came in. Macri came in and he righted the wrong.

Now, this is not a good analogy. Because the countries are very, very different. I mean, they are enormously different. My point though is though that the great unknown with Venezuela is.... right now the trajectory is just downward. There doesn't seem to be any glimmer, it's downward. And it may well be that the only thing that ultimately moves it upward is that private creditors deciding enough is enough. And having a sea change coming from inside the country. I'm not an expert on foreign relations and the people there are in horrific straits, so I can't comment on that. But it may well be the only thing that's left.

I do think that creditors ultimately have no choice and they have to pursue their assets and they’ve gotta pursue their rights.

OP: I was going to ask you a loaded question but you already touched on it. So many people are starving and dying in hospitals from treatable ailments; there's a refugee crisis. I was wondering if there's something really unseemly about a bunch of rich investors demanding billions of dollars from a broke country? I know that you can't answer that necessarily…

JA: Yeah, you know, I can't answer it. I mean you saw Rubio come out the moment that Goldman got paid. Basically, Rubio said that this was a way to fund Maduro, the unlawful government that is causing all of these tragic effects in Venezuela.

I think it really depends. It's hard to guess from this vantage point. But to the extent that creditor efforts, particularly if the government gets involved and allows some room to negotiate a solution, it may well be that creditor efforts could actually lead to help on the ground. It really depends on how the government is ultimately able to work out that debt and whether the United States government is willing to participate in that. And participate even in the sense of saying “OK, we are going to allow this sort of a restructuring, we are going to allow this kind of deal.” And get relief from sanctions. It may well be that doing this is ultimately what helps the Venezuelan people.

OP: So, what you're saying is by helping to resolve these outstanding debts, perhaps sanctions could be lifted, and this cloud of debt could be lifted somehow, that's what could improve the situation? Related: All Eyes On Iran As Oil Prices Soar

JA: Right. And it could be extended, and some of the heat could be taken off of the government. I think a big part of this, with Maduro is we have an incredibly corrupt government. PDVSA is being run by military, which is not only corrupt but inept. And very often, if you can bring in outside creditors, with the U.S. government’s blessing in certain circumstances, and work a deal, you might be able to free up some way for money and supplies to get to the Venezuelan people, which ends up being a win-win for everybody.

I can't tell you that I see how that happens sitting here today. But I don't think that the answer is necessarily that the Venezuelan people continue to suffer, and nobody gets paid on their debt, and Maduro stays in power, and PDVSA goes into the ground so that now there’s no money. I think that virtually any other way that PDVSA can be run is probably better than what we have now.

OP: Yeah, as somebody who writes about Venezuela pretty routinely, I'm always wondering what happens next? I mean, the picture looks so grim. You have oil production declining fast, no money, and a humanitarian crisis. And it's hard to see how they ever get out of this. Some people say the way to stabilize the situation would be some sort of coordinated international assistance, an IMF program, and ultimately massive investment in the oil sector. But, you know, that's kind of a long-term proposition.

JA: Yeah. I think that comes after this [debt situation] is resolved. Or, not after it's resolved, I think it's certainly comes after it's all teed and in play.

OP: And none of that investment or international assistance can really occur in the current political context, let alone the debt situation.

JA: That's my feeling. I would agree with that. I don't see that happening at all.

OP: So, I guess we have to wait until after the election. But my sense is that it gets way worse before it gets better. Because after the election, you could have U.S. sanctions tightening, which makes the oil situation way worse. You know, oil production declining…if there is a ban on Venezuelan oil heading to the U.S., production declines will accelerate.

JA: Yeah. I think that's right. As PDVSA continues to fall apart.

OP: Exactly, so what happens in the short-term, in the next year or so?

JA: I think that's where we really get back to where we began. And now I'm not talking about the population of Venezuela, which is above my pay scale in terms of how they get help. You know, I don't know. It's obviously one of the world's great tragedies. So, greater minds than mine with more experience at this are going to have to resolve.

But I think, what you’re seeing now, both in terms of the humanitarian crisis and the fiscal crisis is that creditors are gearing up and saying “look, the status quo is not helping the Venezuelan people and it's not getting us paid. It's doing neither of those things. Right? Maduro's in power. He is starving his people. He is destroying the country's single greatest asset. We're not being paid. People are starving.”

One thing is something's gotta shake up the status quo because the status quo is no good. Anytime you do that you have to worry. You always want change, but you don't want change for the worse. And I think that is the bigger challenge.

OP: We haven't seen creditors try to seize Venezuelan oil yet, have we?

JA: No, I think there have been some challenges. But nobody actually seized anything.

OP: I was wondering to the extent to which the debt situation affects actual oil coming out of the ground and heading to the international market. How does this play into that? Venezuela's oil production is already falling at quite a rapid rate. How would this fight among creditors affect that? Could it accelerate it?

JA: I can tell you that anybody that’s looking to enforce this debt is looking to go after oil. There's no question about it. And so what it does is it increases the pressure on Venezuela exponentially. Without a doubt. There's no question, there's absolutely no question.

By the way it's not going to be simple to do, right? Because Citgo is a separate entity from PDVSA, and PDVSA is a separate entity from the Venezuelan government.

Ultimately you can only... let's assume you are a debtor. You owe me $100, I got a debt against you. I can only collect from you. Assets that belong to you, even if they are in a third party’s possession. I can't go ahead and go to one of your family members or friends and say, “Yeah you know Nick, so you pay me. I'm going to take your car.”

They're going to have to be arguments that indeed Corporation A, Citgo, is really an alter ego of PDVSA. Or PDVSA of the government. That's complicated litigation. That's going to have to be fought out as well. So, it isn't easy, but it's a cloud. Without a doubt, it's a cloud. It exposes shipments and everything else to a whole lot more risk.

OP: Yeah I guess that's what I was trying to get a sense of. Say, creditors tried to lay claim to Venezuelan oil exports somehow. Does that shut in production somehow?

JA: It's not so much production that's the problem. Because nobody's going into Venezuela to get it.

OP: Right. No, of course. But once they do try to export it?

JA: Then it's at risk. Yeah. It's at risk. It could be seized.

By Nick Cunningham for Oilprice.com

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