The keys to Venezuela's proposal to restructure its foreign debt

Overwhelmed by an unprecedented crisis, Venezuela proposed to the holders of bonds of the Republic and the state-owned Petroleos de Venezuela (PDVSA) to "interrupt" the payment of interest and capital, an action that, in practice, implies a restructuring of the debt.

The following are five keys to this proposal:

Which companies or institutions issued the bonds?

The interest payments that Venezuela proposed to interrupt were issued by the Ministry of Finance, PDVSA and Electricidad de Caracas. The last two are companies managed by the State.

The Venezuelan government has said that U.S. sanctions against its officials, public companies and financial system have prevented it from complying with the obligations and that the proposed interruption of interest payments "protects" investors.

But the Venezuelan economist Jesús Casique told Efe that the South American country has not cancelled its commitments, not because of the sanctions, although they do affect it to some extent, but "because of (the decline in) cash flow, affected by the fall in (oil) production".

"We are producing barely 367,000 barrels per day (of oil), that is, this vertiginous fall, this slide effect, has affected the 'cash flow' of the country's public finances" and affected interest payments, he added.

What are the conditions of the proposal?

According to the information disclosed by Nicolás Maduro's government, bond holders will have until 13 October to accept the proposal, which they must do by means of an official communication to the Venezuelan authorities if they accept it.

The proposal will only become effective if 75% of the holders of the series of bonds of each of the three issuers - that is to say, 75% of the bond holders of each issuer - accept it and, furthermore, cease or avoid making legal claims for non-fulfilment of obligations.

In this respect, Casique pointed out that other conditions are implicit in a debt renegotiation, such as "decreasing the amount" of capital and handling long terms, two circumstances to which the Nicolás Maduro government did not refer when announcing the proposed interruption.

The bonds, said Casique, "are governed by New York law", where the US financial system operates.

"Any debt restructuring or government financing agreement is invalid before international courts" if it does not conform to New York law and the terms of the U.S. Office of Foreign Assets Control (OFAC).

In other words, Venezuela's proposal is not definitive and the conditions could vary, since it is not the country that must establish them, but international entities on which the process depends.

Is Venezuela, in practice, in suspension of payments?

According to Casique, in practice, Venezuela has been in suspension of payments since 2017, when it last met its bond obligations - for more than 1.121 billion dollars - hoping to access new financing and restructure the payments of obligations due in 2020.

"Venezuela's 'default' is in the order of $22-23 billion," the expert told Efe, before pointing out that the country's "consolidated debt" amounts to $175 billion, an amount equivalent to 178 percent of Venezuela's GDP, if one looks at the figure reported by the IMF for this indicator in the South American country: $62.921 billion.

Casique also estimated that a debt with the characteristics of the Venezuelan one "is not justified", since the country enjoyed revenues in the order of $630 billion thanks to oil booms between 2004-2008 and 2011-2014.

Officially, Venezuela has not declared itself bankrupt, even though for the reason given it ceased to honour its obligations. But the country did declare it was in the process of renegotiating its debt, which began in 2017.

In November of that year, the agencies Standard & Poors and Fitch declared the country in suspension of payments or partial default and restricted default, respectively, after the interest on PDVSA's bonds was not paid.

Do the US sanctions have an impact?

"Obviously, the sanctions have affected all Venezuelans," said Casique. But the sanctions, he clarified, hinder the process of debt restructuring and access to new credit, and are not responsible for Venezuela being - in practice - in suspension of payments.
"Venezuela has been going through cycles of economic contraction before the sanctions. The sanctions began in 2017, and Venezuela has been dragging its GDP down since 2013," he explained.

However, he insisted, the country will face complications in restructuring the debt, since holders will need special authorisation from OFAC to enter the negotiations.

Since 2017, when the United States stepped up its policy against Maduro, this office has issued a battery of sanctions that have reached dozens of Venezuelan officials and companies.

Thus, U.S. citizens or companies with commercial interests in that country are prohibited from doing business with those sanctioned, several of whom are responsible for the renegotiation process that Venezuela hopes to bring to a successful conclusion.

This is the case of Venezuela's oil minister, Tareck El Aissami, who is subject to sanctions and even to US accusations of alleged drug trafficking.

When presenting the proposal, Venezuela's vice-president, Delcy Rodríguez, said her country understood that many of the bond holders would need a "regulatory licence", and that she would do everything possible to help investors obtain one.

But Venezuela's mediation with OFAC seems complicated by an obvious contradiction: it would be the sanctioned officials and companies themselves who would apply for a license for investors to negotiate with them.

Will Venezuela be able to renegotiate its debt?

For Casique, debt restructuring has a political component that makes negotiations difficult, but not impossible.

"It is a political issue," he said. "It has to go through the international courts, through the OFAC, it is a purely political issue, it goes through the agreements and negotiations that the (Venezuelan) central government reaches with the government of the United States," he said.

In this regard, he said that Venezuela would have to make some concessions, such as publishing the macroeconomic figures, which it has not been publishing for a long time.

"If the creditors accept the renegotiation of the debt, they are going to demand, fundamentally, that the Central Bank publishes the statistics," a data that includes the nation's budget.

"The last budget of the nation that the government published was for the year 2015, so we don't know the budget of the nation, any investor requires a budget, to know how the country is in the macroeconomic environment to be able to make an investment decision," he said.