Bloomberg: Gulati told me by e-mail that he and Buchheit found their solution "because I was teaching a class on How to Restructure Venezuelan Debt – and Lee had come down to talk to my students – and then we had drinks, and did what we do over drinks (sadly, reading indentures)." That sounds idyllic, actually, and it's really the only way to do it.

A Venezuela theory.

Most countries that default on their debt at least have the advantage that it's hard to foreclose on them. Usually when a country runs out of money and refuses to pay its creditors, the main penalty is that creditors don't lend it any more money. This is bad enough; after all, the country has run out of money and needs more. But usually the creditors can't seize the country's stuff, except in limited symbolic ways, like when Argentina absent-mindedly allowed a hedge fund to seize a navy ship.

Venezuela, though, is different: It is a country with a hard-to-sustain debt load, but it has an oil company attached, one that sells a lot of oil in the U.S. Venezuela's state-owned oil company is called Petróleos de Venezuela SA, and it has a lot of debt outstanding, and people tend to think that PDVSA's debt is Venezuela's problem and Venezuela's debt is PDVSA's problem. So if either Venezuela or PDVSA restructures its debt, then it will need to deal with the risk that holdout creditors who refuse the restructuring might try to go after the streams of dollar payments that PDVSA/Venezuela get from selling oil into the U.S. 

Here is a proposal from sovereign-debt restructuring experts Lee Buchheit and Mitu Gulati on "How to Restructure Venezuelan Debt." The modern way to restructure sovereign debt is to make sure that your bonds contain collective action clauses, in which holders of a supermajority of the bonds can vote to extend maturity or reduce interest or principal. The government negotiates with its main bondholders, and convinces them that restructuring the debt is the only way for them to get paid anything, and when they agree that binds everyone: Holdouts can't keep their bonds and demand more. Most of Venezuela's sovereign bonds do contain collective action clauses allowing a restructuring with a vote of 75 or 85 percent of the holders, though some do not, and even getting 75 or 85 percent of each series of bonds to agree to a restructuring might be challenging. (More modern collective action clauses aggregate voting across series, to prevent a hedge fund from blocking a restructuring by building up a 26 percent position in a single bond.) Buchheit and Gulati have some ideas for how Venezuela can improve its chances here, including their delightfully named "cryonic solution" that we have previously discussed.

But the PDVSA bonds are harder, because they don't contain collective action clauses: PDVSA is a company, and its bonds look kind of like normal New York-law corporate bonds, and corporate bonds don't usually contain collective action clauses. (Because, for corporations, the rough equivalent of a collective action clause -- a restructuring binding on all creditors -- is bankruptcy, which is not so appealing for PDVSA/Venezuela.) 

But there's a trick that might work. One clause in the PDVSA indenture (Section 10.02) allows PDVSA to "delegate any of its obligations hereunder" if it gets the approval of a majority of bondholders. Buchheit and Gulati propose that PDVSA could do an exit consent in which it offers consenting bondholders new exchange bonds (with longer maturities, lower rates, and perhaps lower principal) in exchange for (1) handing in their old bonds and (2) on the way out, voting to amend the old bonds to delegate PDVSA's payment obligations to a new company. Call it "PDVSB." (Oh, fine, they call it "Newco.") This Newco would not have to be a particularly good company; in particular, Venezuela's oil revenue would not have to run through it. So you get your choice: Exchange into the new bonds, which have longer maturity and lower interest and maybe lower principal, but which are backed by Venezuela's oil revenues; or keep your old bonds, which have the same terms as before, but which are now backed by whatever Venezuela decides to put into Newco. And if Newco defaults, that's not PDVSA's, or Venezuela's, problem.

This seems like cheating, but something like it was explicitly blessed by a U.S. appeals court in the recent Marblegate decision, which allowed a company to do a restructuring that left holdout bondholders with bonds in a more-or-less empty shell. (Buchheit and Gulati don't want to make Newco a purely empty shell, because that "would be seen for what it is -- blatantly coercive and punitive -- and will inevitably end up in court," and propose instead "to fund Newco with a percentage of its net revenues from the sale of oil during periods when the average price of Venezuelan oil exceeds a specified threshold," giving the Newco bonds some chance of being paid off if the price of oil recovers.)

Will it work? I don't know. The world of sovereign bond restructuring is mostly not driven by general principles: It's not like there is agreement on the correct way to go about a negotiated restructuring, and a consensus that everyone will abide by the results. Instead it is a hodgepodge of idiosyncratic bond provisions, and of individual judges confronted with those provisions and tasked with interpreting them. Gulati told me by e-mail that he and Buchheit found their solution "because I was teaching a class on How to Restructure Venezuelan Debt – and Lee had come down to talk to my students – and then we had drinks, and did what we do over drinks (sadly, reading indentures)." That sounds idyllic, actually, and it's really the only way to do it.

Elsewhere: "‘They All Deserve to Die’: Caracas Militants Vow to Take Up Arms."