Venezuela’s Tenuous Future Holding Bondholders Hostage and Complicating Restructuring Plans

A major crisis, both political and economic, has been brewing in Venezuela for some time.  The most recent, dramatic events that have been enfolding over the past few months seem to indicate a boiling point for the South American country.  In its wake: unclear and significant implications for both bondholders and subsequent restructuring schemes.   

These issues largely stem from the death of socialist president Hugo Chávez in 2013 which prompted his vice president, Nicholas Maduro, to take over as leader, a role he currently holds, at least for the moment.  Maduro’s term henceforth has been marred with controversies and constant friction with “the opposition”, or the Democratic Unity coalition.  In May 2018, Maduro’s hotly contested re-election prompted serious outcry from not just the opposition, but also international governments, including the United States and Lima group (a group of twelve Latin-American countries), regarding accusations of illegitimate results from alleged vote-buying.  However, January 2019 saw Maduro’s controversial inauguration as well as the dramatic swearing in of Juan Guaidó - a virtually unknown, 35-year old opposition lawmaker – as Venezuela’s interim, and self-proclaimed legitimate president.  The United States, as well as Canada, Brazil and Argentina (to name a few) have all publicly acknowledged Guaidó as the true leader of Venezuela, whereas supporters of Maduro include nations such as Russia, China, and Turkey. 

Juan Guaidó, president of the National Assembly, and self-declared, legitimate leader of Venezuela 

Economic conditions in Venezuela offer a similarly bleak situation, with hyperinflation exploding, the economy shrinking to almost half of what it was in 2013, and exports, of which over 90% is oil, falling dramatically.  Aggravating these economic realities is the mass exodus of many Venezuelans, with estimates reporting that around 2.3 million citizens have fled the troubled nation since 2015.  Furthermore, shortly after recognizing Guaidó’s legitimacy this past month, the United States imposed sanctions on PDVSA, Venezuela’s state-owned oil company, in an effort to further undermine Maduro and his administration.  Effectively, this move prevents U.S investors from holding PDVSA-issued bonds. 

The potential shake-up of leadership from Maduro to Guaidó offers a slightly more optimistic picture for bondholders.  However, the difficult task in this situation is the restructuring of the country’s debt, contingent on the event of an official transfer of power.  Venezuela holds a lot of debt, with some estimates putting its debt outstanding at $140 billion.  Since 2017, the nation has defaulted on much of its financial liabilities.   

In efforts to solve this issue of repaying creditors, talks of various restructuring plans have started to circulate.  However, a University of North Carolina law professor, Mark Weidemaier, has noted that “Unlike clean restructurings where there are only a few debt instruments and you can imagine a table that creditors could theoretically sit around and negotiate, with Venezuela, you don’t have that.” Proposals have already been put forth which include a “nuclear option” or the Buchheit-Gulati proposal.  This plan would call for the seizure of revenues from Venezuela’s oil sales by US creditors and holders of Venezuelan debt.  This strategy was used by President Obama with Iraq between 2011-2013.  Critics of the plan argue that the extreme approach could have adverse effects on the already fragile country and discourage future (as well as critical) investment in the nation.   

Adding to this situation is the frustrating reality that implementing any potential, and complicated, restructuring scheme cannot happen until this formal political shift occurs in favor of Guaidó or any democratic leader.  Until the political situation is dealt with, a lot of these plans are just that – words with no action. Unfortunately, all that can be done now is patiently wait and see which end of the ideological spectrum, democratic or socialist, Venezuela ends up on.