Lien-ing on PDVSA: The Positive Side of Negative Pledge

Abstract

This Proposal remedies a crucial issue: the holdout creditor’s ability to thwart a PDVSA and Republic of Venezuela restructuring. It addresses this concern by unburdening the corporation of its attachable assets in order to frustrate asset-seeking potential holdouts before negotiations to exchange old PDVSA instruments for new Republic bonds. There is express contractual authorization – a permitted lien exception to the negative pledge clause – in PDVSA’s bonds and promissory notes that gives the corporation the right to pledge all of its assets to the Republic and give the Republic a senior lien, prioritized above all other creditors. Upon completion, the transaction leaves PDVSA as an unattractive target for holdouts. As this language is not found in any issuances by other state-owned oil companies (including multiple Latin American oil companies similarly situated to PDVSA) that otherwise contain very similar contractual language, it is the strongest contractual weapon in PDVSA’s arsenal. After this permitted lien is utilized to successfully compel the holdout creditors to participate, we advocate for the use of Original Issue Discount on the bonds to reduce PDVSA’s overall debt stock during the exchange of old debt for newer consolidated debt.