“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.

May face argentina-style fight with holdouts

Saturday, January 23, 2016

Caracas risks legal drama if it defaults

MIAMI/NEW YORK — The lack of collective action clauses on close to US$40 billion 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 percent 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$35.6 billion 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 percent September 2027s and US$300 million of 13.625 percent August 2018s.

Herald with Reuters