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An Update on the Venezuelan Debt Crisis: A Lack of Regime Change and Continued U.S. Sanctions Delay Prospects for a Near-Term Debt Restructuring

Here’s an update on recent political, social, and economic developments in Venezuela.[i]  From our perspective as a blog focused on insolvency and restructuring topics, the upshot of what’s been taking place in Venezuela is that the chances of a debt restructuring in the coming months remain slim. 

Early this year, Juan Guaido, the leader of the opposition party, declared himself interim President and was recognized by the U.S. and 50 other nations.

In April, Guaido tried to topple the government of President Nicolas Maduro but failed.  Maduro’s grip on power held because the military’s leadership stayed loyal to him.  Reports afterwards said that a disappointed U.S. President Donald Trump then turned his attention away from Venezuela and immediate regime change.

Meanwhile, the conditions for residents under the Maduro government are drastic.  Food, fuel, and medicine are scarce.  The public health system has collapsed.  Power outages and crime are widespread.  And, in the past few years, more than five million residents reportedly have fled to other countries in South America, Spain, and the U.S.

Sanctions first imposed by the U.S. against Venezuela and officials there in August 2018 remain in place.  Among other things, U.S. bond investors must hold their paper or sell to foreigners.  U.S. investors can’t acquire new Venezuelan debt issued after August 17, 2018.

The twin factors of Maduro’s hold on power and the sanctions mean that any restructuring of Venezuela’s outstanding $175 billion in debt is still likely far off from now.  Even so, on July 1, Guaido issued a three-page set of guidelines for debt restructuring.  The statement stressed that the humanitarian crisis must be addressed before relief for bondholders can occur.

The statement suggested that any creditor restructuring will include the same treatment for all creditors, irrespective of whether bonds were issued by the government or the state-owned oil company Petroleos de Venezuela (“PDVSA”).  The proposal also said payments will be made according to contractual terms; no preference will be given to holders of judgments.  But if regime change does take place and Venezuelan oil imports increase, judgment creditors can be expected to seek to attach and seize assets outside Venezuela.

A group of bondholders issued a statement in response to the guidelines.  Their statement acknowledged that the humanitarian crisis must receive priority.  It also said the group would support Guaido and successor democratically elected governments.  But it highlighted that debt negotiations won’t take place as long as Maduro is in power and US sanctions are in place.  The statement also said the group looks ahead to when Venezuela has a reorganization law that could receive recognition in a case under chapter 15 of the U.S. Bankruptcy Code.

In another development, the government of Norway has brought together representatives of Maduro and Guaido for talks to seek a negotiated resolution.  

Finally, both Maduro and Guido have also been active in U.S. court proceedings.  The Venezuelan government under Maduro filed suit in Delaware Chancery Court, seeking a ruling that Maduro’s government can appoint the board of directors for controlling PDVSA and its subsidiaries.  These related companies include Citgo Holding, Inc. and Citgo Petroleum Corp.

In two creditor-enforcement actions in New York concerning defaulted debt, Guaido said his interim government lacks access to and control over resources needed to resolve the lawsuits.

We will continue to follow and report periodically on these and other developments in Venezuela.

[i] Our previous posts on the debt crisis in Venezuela can be found here: November 16, 2017 and October 18, 2018.