The markets have long debated whether the Venezuelan authorities
would or could attempt to restructure Republic bonds while leaving PDVSA
securities untouched. (No cross-default clauses link the bonds of each obligor with
the other.) The argument supporting this view has focused on two factors.11 First,
Venezuelan oil is sold by PDVSA and its subsidiaries. The legal enforcement risks
associated with a bond default would therefore fall more immediately, and more
heavily, on PDVSA. Second, most series of Republic bonds contain collective action
clauses that permit a super-majority of holders (75% or 85%) to agree to a
restructuring with that decision binding all holders of the series. The absence of
collective action clauses in PDVSA bonds have led some investors to conclude that a
restructuring of PDVSA bonds would inevitably be a messier affair, potentially
threatening the lifeblood of an economy that derives 95% of its trade revenue from
the sale of oil. This, the argument goes, is something the Venezuelan authorities
would consider only as a last resort.
Our view is to the contrary. For the reasons discussed below, we
believe that restructuring PDVSA bonds may actually be easier, and less prone to
holdout behavior, than a similar exercise for Republic bonds.
