Buchheit and Gulati: The Coming Need for a Standstill in Venezuela
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One feature shared by both PDVSA and Republic bonds is a requirement that holders of at least 25% of the principal amount of the bonds of a series must consent before the principal of the bonds can be accelerated. Each of these instruments, however, permits holders of 50% of the principal amount of the bonds of that series (66⅔% in the case of Republic bonds containing collective action clauses) to amend this provision to specify a higher voting threshold to accelerate the bond.
One possible approach is this: Immediately upon taking office, a new administration in Venezuela could request the holders of each outstanding PDVSA and Republic of Venezuela bond to approve an amendment increasing the voting threshold for acceleration from 25% to, say, 51%. That modification would terminate after six months — long enough for the IMF to make a preliminary assessment of the economy and for the authorities, in consultation with the IMF and the affected creditors, to formulate a plan for restructuring the debt. Scheduled payments of principal and interest falling due during the standstill period would continue to be outstanding and would continue to bear interest. The failure to pay those amounts on the scheduled due dates during the standstill period could not, however, result in an acceleration of the instrument unless at least a majority of holders voted in favor of that acceleration. The majority holders would thus at all times control the process.
Lee C Buchheit and Mitu Gulati are at Cleary Gottlieb Steen & Hamilton LLP and Duke University, respectively.