Venezuela: The Venezuelan Collective Action Clauses
1. Adoption of Collective Action Clauses by Venezuela
Venezuela started including collective action clauses (CACs) in its international bonds issued under New York law in 2003. Currently, Venezuelan international bonds that include CACs represent an aggregate principal amount of approximately U.S.$ 4.17 billion out of a total principal of foreign external indebtedness of approximately U.S.$ 24 billion (excluding foreign external indebtedness of Venezuelan quasi-sovereigns such as Petróleos de Venezuela, S.A.1). It now seems that CACs have become a standard feature in Venezuela’s international debt securities issued under New York law.
Venezuela joins Mexico, Brazil, Uruguay and other Latin-American sovereigns that had previously included CACs in their global bonds issued under New York law. However, Venezuela and Brazil are the only sovereigns whose CACs require an 85% approval threshold, as opposed to Mexico —and the majority of the other sovereigns that have included CACs— whose CACs have a 75% approval threshold.2
Set forth below is a chart that identifies the Venezuelan international bonds that currently contain CACs.
Aggregate principal amount
2. Description of the Venezuelan CACs
The "standard" CAC included in Venezuela’s international bonds issued under New York law from September 2003 includes an 85% approval threshold to amend the payment terms of the bonds as well as some non-payment terms that are very important to noteholders.
More specifically, 85% in aggregate principal amount of each series of "outstanding"5 notes is necessary to:
- change the due date for the repayment of the principal,
- reduce the principal amount of the notes, or the portion of such principal amount that is payable upon acceleration of the maturity of notes,
- permit early redemption of the notes,
- change the interest rate on the notes or any premium payable upon their redemption,
- change the currency in which interest, premiums and principal of the notes are payable or the required place or places at which payment of interest, premium or principal of the notes is payable,
- shorten the period during which Venezuela is not permitted to redeem notes, or permit Venezuela to redeem the notes of a series if, prior to such action, Venezuela is not permitted to do so,
- reduce the proportion of the principal amount of notes of a series the vote or consent of the holders of which is necessary to modify, amend or supplement the fiscal agency agreement governing the notes or the terms and conditions of the notes of a series,
- change Venezuela’s obligation to pay so-called "Additional Amounts",
- amend the definition of the term "outstanding" with respect to the notes,
- change the governing law provisions,
- change Venezuela’s appointment of agent for the service of process or Venezuela’s agreement not to claim and to waive irrevocably any immunity, and
- change the ranking of the notes of a series.
Venezuela has followed the new market-based approach of including CACs in its international bonds issued under New York law in order to facilitate restructurings. It does not seem that the adoption of CACs by Venezuela has increased Venezuela’s borrowing costs. In effect, the international capital markets have recently shown increased demand for Venezuelan debt, substantially reducing the spreads over LIBOR of Venezuelan debt.
The question remains as to whether Venezuela and the market will accept a Venezuelan CAC with a 75% approval threshold as have been adopted by other Latin-American sovereigns, even by issuers that don’t have an investment grade.
1 PDVSA Finance, Ltd. which is Petróleos de Venezuela, S.A.’s financing arm recently repurchased approximately $2,511,822,144 of its outstanding notes. These notes were originally issued under a financial structure that was backed by oil receivables and had an investment grade when originally issued in May 1998. Under the indenture governing these notes, holders of a majority in principal amount of the notes, PDVSA Finance, Ltd and the trustee could modify several terms and conditions of the notes excluding payment terms.
2 See, GALVIS, Sergio; SAAD, Angel, Collective Action Clauses: Recent Progress and Challenges Ahead. February 20 2004.http://www.law.georgetown.edu/international/documents/Galvis.pdf
3 The coupon of this series of notes is well below Venezuela’s yield curve. This is because these notes are denominated in U.S. dollars but local Venezuelan investors were allowed to purchase the notes by paying in bolivares (the local Venezuela currency) at the official FX rate. Thereafter, Venezuelan investors were able to sell their notes in the international markets were they trade at a discount over par, in exchange for U.S. dollars.
4 See note 3 above
5 In general, the term "outstanding" does not include notes held by Venezuela or Venezuelan public sector instrumentalities.
Copyright © 2004
Carlos Omaña A.
Carlos Omaña A.
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