Jay Newman, the former hedge fund manager who helped billionaire Paul Singer win a 15-year fight against Argentina, has a word of caution for investors looking to replicate his success amid the chaos unfolding in Venezuela.
Now retired from Singer's $34 billion Elliott Management, Newman is drawing from his own experience waging one of the most epic battlesin the history of hedge funds. In overseeing Elliott's investment in Argentina's defaulted debt from start to finish, he masterminded efforts to collect on a court order for full repayment on the notes, including a global quest for government assets to seize.
The conventional thinking among investors is that Venezuelan assets, especially those of state-run Petroleos de Venezuela , will be much easier to take control of simply because there are more of them scattered around the world. It's not so simple, says Newman. The $30 billion of debt issued by PDVSA, in fact, may be worthless in a default, he says.
“PDVSA doesn't own the oil. It's some amalgamation of production assets, trucks, offices and rusted pipe,” Newman said from New York. “The oil belongs to the state. If PDVSA is reorganized under local law, external bonds could be a zero. Investors should be thinking about the possibility that they will never see much, if anything at all, on their PDVSA bonds.”
The cash crunch in Venezuela is coming to a head. Earlier this month, the government announced it would restructure its debt with global investors, and along with PDVSA has since been deemed in default by ratings companies on the back of significant bond payment delays. A panel of credit derivatives dealers and investors ruled Thursday that the delays triggered payouts on credit-default swaps tied to their debt.
The country insists it will keep paying its obligations while it sorts out a restructuring plan -- something that's nearly impossible to do with U.S. creditors because of sanctions that restrict their engagement with some top officials, as well as the purchase of new debt.
The doomsday scenario Newman envisions has been floated for a while, but mostly shrugged off. It involves Venezuela effectively writing off PDVSA's billions in debt by transferring the company's oil-drilling concessions, operating team and infrastructure to a new entity, leaving the old PDVSA without any of its assets but all of its existing liabilities. (Like a so-called bad bank, but for an oil company.) That would leave investors with few scraps to fight over to cover a tremendous amount of debt.
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It could happen under Venezuelan law, and there's little investors can do about it, even if their bonds were issued under New York rules. While that allows creditors to take PDVSA to court in the U.S., and to try to enforce judgments against them, “if PDVSA, as an insolvent company, is being administered under a Venezuelan statutory regime, all bets are off,” said Newman, who's also a former attorney.
Other debt experts agree. The government may opt to transfer PDVSA's assets to itself and then offer to exchange PDVSA debt for government debt, in an effort to discourage creditors from holding out for a better deal, Adam Lerrick, a visiting scholar at the American Enterprise Institute, wrote in a report last month. Those who do holdout would have “a claim on an empty box,” he wrote.
Even if investors were able to get their hands on PDVSA's foreign assets, Newman says they're probably only worth about $3 billion -- a tiny amount relative to the company's debt -- since so much has been borrowed against them. So it wouldn't be a huge loss for Venezuela, or a huge gain for investors, if they got taken over. Which, by the way, is a lot harder to do than many investors think.
“Good luck to people who want to chase assets,” Newman said. “Been there, done that. It's a very expensive, time-consuming, and difficult process that's fraught with pitfalls. It's not for the faint of heart, and very few firms have the skills, long-term commitment -- and the stomach -- for that kind of activity.”
He should know. In a bid to collect on billions in awarded judgments that Argentina had refused to pay, Elliott tried to lay claim to everything from funds allegedly embezzled by government figures into shell companies in Nevada to Argentina's rights to launch satellites from one of Elon Musk's rocket ships. At one point, the hedge fund even managed to seize an Argentine naval vessel docked in Ghana.
It was ultimately their legal maneuvering and relentless persistence that ensured the hedge's fund success. Argentina settled with Elliott for about $2.4 billion in 2016, about four times the principal value of the hedge fund's bond claim -- and probably well beyond what the investors paid for the notes.
The strategy was wherever Argentina went, Elliott would be there as a thorn in its side, keeping officials fearful of the next embarrassing seizure, and preventing the country from accessing capital markets -- even getting a court to block it from paying creditors who held its restructured debt. That provided plenty of motivation for President Mauricio Macri to settle shortly after he came to power in late 2015 on a pledge to restore Argentina's economy and normalize its international standing.
For now, Venezuela seems able to tolerate its pariah status amid widespread condemnation of President Nicolas Maduro's anti-democratic push and rampant accusations of human-rights violations. The belief that PDVSA's tankers, refineries, oil shipments and receivables will provide investors with some recourse in a default, as well as an incentive for the company to keep paying its debt, may be totally off-base, Newman said.
And for those believing that Venezuela, a nation dependent on revenue from oil exports, would never do creditors so dirty because it would leave a permanent mark on the country's ability to lure investors, Newman again pointed to Argentina. Despite its decade as a market outsider because of its treatment of creditors, the country sold almost $3 billion of 100-year bonds, just 16 months after settling with Elliott. It's one of four developing nations to have issued century debt abroad.
In the meantime, “this will be a waiting game,” Newman said. “Waiting for Maduro, waiting for the opposition, waiting to see if sanctions bite. It's difficult to see how this gets settled with Maduro in that seat.”