Defaulted Venezuelan bonds have rallied from 30 cents to 40 in anticipation of some kind of debt restructuring since the US captured President Nicolás Maduro on 3 January and left his vice president in charge.
So far, Donald Trump and his administration have talked a lot about the country’s oil, but haven’t outlined plans for Venezuela’s defaulted debts, totalling at least $150bn or over 200% of gross domestic product. The country stopped making payments in late 2017 as it entered hyperinflation.
Here are 11 considerations for the potential debt restructuring.
1. Bondholders shouldn’t be this excited
Taken at his word, Trump wants to triple or quadruple Venezuelan oil production, which will require something like $100bn in investment over at least a decade. Creditors owed money by Venezuela are largely an obstacle to this mission. They want a massive payout from the only industry that generates dollars in exchange for (basically) nothing. Most creditors have no oil expertise and can’t help the industry recover – they just want to get paid.
As such, current bond prices seem totally unreasonable. A debt workout where junior creditors got 40-50 cents on the dollar (via new bonds) and senior creditors got even more would saddle Venezuela and its oil company PDVSA with massive principal and interest payments that would divert a mountain of money away from oil investment and the country’s reconstruction. Why would Trump want that? Venezuela might regain access to capital markets if all goes well, but is that worth the $60bn-$100bn in ‘recovery value’ creditors are seeking? No.
2. Early signs suggest Trump will just ignore creditors
In his big meeting with oil executives on 9 January, Trump told ConocoPhillips and Exxon Mobil (who are owed around $14bn in total from Hugo Chávez-era expropriations) that the US was starting with a clean slate, and that they should ‘write off’ their debts if they aren’t willing to invest in Venezuela.
In a similar vein, Trump signed an executive order that protects Venezuela’s oil revenue from being seized by creditors trying to get paid, undercutting any leverage that creditors might have gained from Maduro’s ouster. (Venezuela’s oil exports and revenues are now wholly managed by the US and are landing in a Qatar escrow that the Treasury manages at its discretion).
3. The US can delay debt restructuring indefinitely
Venezuela, PDVSA and a number of related entities are still under sanctions imposed by the Trump and Joe Biden administrations that make a restructuring impossible. As a result, the US government can threaten to leave creditors in financial limbo unless they accept a debt exchange with large haircuts that leaves Venezuela and PDVSA with manageable payments.
Beyond sanctions and sanctions relief, because most of Venezuela’s debt is New York-law debt contracts and other claims in the American legal system, the US generally has significant leverage in any negotiation. Iraq’s 2006 debt restructuring shows just how much the US can help sovereign debtors.
4. Having said all that, there may never be a better time to restructure
Trump’s administration is surprisingly committed to Venezuela’s oil industry, so it’s not a bad idea to capitalise on that goodwill to restructure the debt on terms favourable to Venezuela before there’s a new US president with different priorities. In addition, while the oil industry (and broader economy) is in tatters and debt servicing capacity is extremely constrained, the country can make a compelling case for massive debt relief. If for whatever reason, Treasury Secretary Scott Bessent and Secretary of State Marco Rubio wanted to get a deal done to give Venezuela a clean slate, that would be fantastic news.
5. Ideally, a legitimate elected government in Caracas would lead to any restructuring
The majority of Venezuela’s enormous debt was taken out in the Chávez (1999-2013) and early Maduro period (2013-16) to fund a breathtakingly corrupt foreign exchange system and wasteful, populist public spending. Politically, it’s easy to sell a deal that wipes out most of this debt so that a new a democratic government in Venezuela can rebuild the country and oil industry.
Debt forgiveness for the same regime that racked up the obligations is sort of incoherent – even if it’s in Venezuela’s national interest. In any case, all we can do is hope that Rubio will succeed in pushing for elections and a transitional justice arrangement sometime this year.
6. If regime change never materialises, a restructuring led by Maduro’s VP may not be terrible for Venezuela
One risk of a Chávista restructuring is that the country doesn’t get enough debt relief and winds up in default a few years later. Another risk is that the regime could agree to a bad deal, for instance by issuing new bonds with pro-creditor provisions and clauses that complicate future restructurings or caving to the creditors that are loudest or come knocking on the door first. But getting good legal and financial advisers (vetted by the US) and having them run the show would mitigate at least some of these risks.
7. Any restructuring will be complicated
One problem is the sheer number of claims. Some estimates say Venezuela owes around $10bn to China, $4bn to Russia, $2bn to other governments, $32bn to bondholders and about $16bn to ConocoPhillips, Exxon Mobil and other firms that were expropriated. PDVSA owes $32bn to bondholders, $17bn to service providers and suppliers, and has $7bn in other financial debts.
And all the debts are different. Most bonds have collective action clauses that make them easier to renegotiate, but some don’t. Some creditors are vulture funds that purchased their claims for 10 cents on the dollar and are happy to get 30. Others, like Russia, China and the multilaterals, will want to get 100 cents, complicating the collective action problem.
8. Another complicating factor is uncertainty about Venezuela’s debt service capacity
How much Venezuela can pay depends on future oil prices and future oil production – two fundamentally unknowable quantities. This uncertainty may complicate restructuring negotiations. If a creditor thinks Venezuela will quintuple oil production and prices will rise over $100 per barrel, they won’t accept an 80% haircut. If they think that Venezuela will fail to raise production and oil prices will stay low forever, then they might.
9. As a result, Venezuela may need to issue equity-like instruments to get creditors onboard and limit holdouts
The history of so-called ‘state-contingent’ instruments (like GDP warrants) is underwhelming, but in Venezuela’s case they might work. The problem with linking payments to a proxy for payment capacity like GDP is that national statistics are published with big delays and governments can fudge the numbers. But oil production and oil prices don’t have that problem; independent third parties regularly report them.
Another problem with state-contingent instruments is that they may be valued for too little if they are too novel or too complex and aren’t appealing to traditional equity or fixed income investors. Another risk is that they could introduce weird incentives by lowering the cost of bad policies.
10. Simple oil warrants are a good option
Instruments with payments linked to oil prices (with linear payments and a high strike price) have been issued by several countries in the past and are well understood by markets. They are essentially a call option on oil with the added twist that the issuer might default (so, a call option with country risk).
For Venezuela, the main downside of payments that only depend on oil prices is that oil production also determines ability to pay, not just prices. In a world with high prices but low production, payments on oil warrants could become unmanageable. This could be addressed by issuing a small quantity of warrants (which limits how much value can be raised by the warrants in the first place).
11. Warrants linked to the market value of Venezuela’s oil production are also an option
Linking payments to oil production multiplied by oil prices ensures that payments are tightly linked to capacity to pay. Obviously, the production data would have to come from independent third parties, like the ‘secondary sources’ OPEC uses to report production, so that Venezuela’s government can’t fudge the numbers.
The downside of this design is the added complexity. Markets might be less comfortable with the instrument, limiting its value. The flipside is that more instruments could be issued as the risks of low production are accounted for. In any case, there are important trade-offs here, and hopefully one day we’ll get to weigh them carefully for Venezuela’s sake.
Frank Muci is a Policy Fellow at the London School of Economics’ School of Public Policy.
This is an edited version of an article first published on the author’s Substack.
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