Venezuelan Debt and Bitcoin Claims

Also Uber, middle-market targeting and lunch breaks.

Sovereign bankruptcy.

When a sovereign nation defaults on its debt, its creditors have two basic choices:

  1. Participate in the inevitable negotiations and accept restructured debt -- probably with a substantial haircut -- in exchange for their pre-default claims; or
  2. Hold out from the negotiations and engage in years of of time- and labor-intensive unpleasantness to try to enforce their original pre-default claims against the country.

Most people usually go with option 1: Usually when a country defaults there's a good reason for it, and the creditors' best bet for a recovery is if the country can get its debt back to a manageable level. On the other hand, if you work doggedly and creatively on option 2, you can make quite a lot of money, though at the cost of sleepless nights, great risk, and being treated as a public enemy in the defaulting country. So usually most creditors negotiate, some hold out, and much of the action in sovereign debt these days is about structuring bonds to solve the collective action problem and let the negotiating creditors bind the holdouts.

But Venezuela maybe kind of defaulted on its debt last week -- who knows!? -- and it's in a different situation. For one thing, there seems to be a vague market consensus that eventually its debt will be renegotiated by a new, democratic, legitimate, and so far hypothetical government that succeeds the current government of Nicolás Maduro, and that anything done to prop up the Maduro regime might ultimately be repudiated, so it is a bit risky for anyone to renegotiate their bonds now. More immediately, U.S. sanctions forbid creditors from renegotiating with the current regime even if they wanted to chance it. So when Maduro announced earlier this month, "I decree a refinancing and restructuring of external debt and all Venezuelan payments," he was mostly speaking metaphorically. It's not like many people -- other than Russia -- were going to show up at those restructuring talks.

So that leaves option 2. (Or of course the ever-present option 3, do nothing and hope somehow it all works out.) Option 2, in the case of Venezuela, is both exceptionally unpleasant -- Venezuela's lead negotiator is an alleged drug kingpin who allegedly "brought in armed gangs to intimidate" opponents in student elections -- and unusually interesting. Most sovereign debtors don't have a lot of assets abroad that creditors can seize. (NML Capital famously seized an Argentine Navy tall ship once, but it's not like it was able to sell the ship at auction.) But Venezuela's state-owned oil company, Petróleos de Venezuela SA, sells lots of oil abroad, and owns Citgo Holding Inc., a U.S. refining company. If you don't worry too much about the formalities, you might just think, well, Venezuela owes me money, and Venezuela owns Citgo, so I can foreclose on Citgo to satisfy my judgment.

If you do worry about the formalities, you might still think that, but it's a lot more complicated: Venezuela and PDVSA (and Citgo) are different entities, each with their own debts, and it's not obvious that you can go after PDVSA for the debts of Venezuela. But it's worth a try. Crystallex International Corporation is a Canadian mining company whose assets in Venezuela were expropriated years ago. It won an international arbitration award against Venezuela, got a judgment on that award in New York, and is now trying to get its hands on some Citgo assets to satisfy that judgment.

It is not obvious that this will work. Mark Weidemaier is skeptical, writing that "the case for alter ego liability" -- holding PDVSA responsible for Venezuela's debts -- "seems thin." Here is more from Richard Cooper and Boaz Morag of Cleary Gottlieb Steen & Hamilton LLP, who are similarly cautious, but who conclude that "One thing is clear: Crystallex’s efforts to pursue its alter ego claims against PDVSA will be closely watched by Republic and PDVSA creditors alike." If Crystallex's effort works, then everyone to whom Venezuela owes money is going to pile in and try to seize everything worth seizing. If it doesn't work then ... then it's not clear what will? 

Bitcoin bankruptcy.

In 2014, Mt. Gox -- "Magic: The Gathering Online eXchange," which grew from that improbable name into at one point the world's largest bitcoin exchange -- suffered the fate of all bitcoin exchanges, and had its bitcoins stolen. Since then everyone has just gotten used to the idea that all bitcoin exchanges get their bitcoins stolen, but at the time it was kind of a big deal; Mt. Gox filed for bankruptcy protection in Japan, where it was based, and customers lost something like 750,000 bitcoins, worth about $500 million at the time. 

But Mt. Gox kept looking for the bitcoins, and I guess it found some. This could lead to some weird results. When Mt. Gox imploded, in February 2014, bitcoin was trading in the hundreds of dollars. (It got as high as $806.83 on February 3, and as low as $451.58 on February 24.) Right now, three and a half years later, bitcoin is trading in the thousands of dollars. (Call it $6,500 and change, with continuing massive volatility.) And Mt. Gox's bankruptcy estate now has about 200,000 bitcoins. Meaning that, in very round numbers, it has about a quarter as many bitcoins as it did at its bankruptcy filing, but each bitcoin is worth 10 times as much.

In Mt. Gox's bankruptcy -- as is generally the case in bankruptcy -- claims against it were reduced to yen amounts shortly after the bankruptcy (in April 2015, when bitcoin was mostly in the $400s), and creditors are entitled to recover up to 100 percent of the yen amount of their claims, but no more. But there is more:

The bankruptcy estate for Mt. Gox holds 202,185 bitcoins worth about ¥169 billion or $1.5 billion at current rates. Meanwhile, the trustee has recognized claims by exchange customers of ¥46 billion based on the April 2014 bitcoin price, a procedure that lawyers say has a sound basis in bankruptcy law.

After accounting for smaller amounts of nonbitcoin assets and liabilities, Mt. Gox has a surplus on paper of ¥111 billion, or $977 million, that could go to its shareholders, according to a calculation by The Wall Street Journal.

This strikes many people -- particularly Mt. Gox's customers -- as unfair. They had bitcoins worth (say) $500. Mt. Gox lost them. Now those bitcoins would be worth $6,500. Mt. Gox is going to give the customers back the $500 -- the amount of their claims in fiat currency -- and keep perhaps a billion dollars for itself. This is particularly galling because "itself" means mainly Mark Karpelès, its former chief executive officer and main shareholder, who is currently on trial for embezzlement. (For allegedly embezzling some bitcoins from Mt. Gox -- but not the 750,000 bitcoins that were stolen by hackers. Again, the main function of a bitcoin exchange is to get its bitcoins stolen, so it shouldn't be surprising that lots of people were allegedly stealing Mt. Gox's bitcoins.)

Here is where I have to confess that people spotted this problem back in 2014 and proposed a solution consisting of, basically, giving Mt. Gox's customers bitcoin-linked claims ("Goxcoins") that would trade on the blockchain and give them a recovery denominated in bitcoins rather than yen. And at the time I ... made fun of them? "If your claim now is for, say, 10 bitcoins worth $6,000 or whatever, then by the time those bitcoins are recovered, they'll be worth $60,000, because Bitcoin is deflationary, and its price can only go up," I wrote, and that sentence was completely accurate (well, the numbers would be about $5,000 and $65,000), but I cannot feel good about it because it was sarcastic. The lessons here are:

  1. Do not take anything I write as investment advice, ever, for any reason, not only the things that look like investment advice but also the general comments; and
  2. Always buy bitcoins. (This is not investment advice.)

In my defense, though, Goxcoin didn't happen. The regular old bankruptcy system did, and it reduced the claims to yen, and now there seems to be a massive surplus over the yen claims, and the claimants are aggrieved. It is hard to know what to make of this. It happens sometimes. If you are going to have a bankruptcy system, it will probably need to reduce claims to commensurable dollar/yen/whatever amounts so that it can divide up the bankruptcy estate. (Simplistically, you can imagine the working of bankruptcy being that you take all the estate's stuff, sell it, and divide the money among the claimants: You sell it for dollars or yen, not bitcoins.) And if you are going to have a bankruptcy system, it will probably take time. There are plenty of debates about how to treat elements of value beyond the strict dollar face amount of the claims -- bond make-whole premiums, for instance, have been litigated a lot in the U.S. recently -- but it is not exactly surprising that Japan's bankruptcy system thinks in yen rather than in bitcoins. 

On the other hand you shouldn't worry too much about this. Someone will sue Mark Karpelès until he doesn't have a billion dollars' worth of bitcoins any more. The bankruptcy estate might only owe the customers $500 per bitcoin, but they -- and regulators, etc. -- might have a case that Karpelès owes them the remainder, due to negligence or unjust enrichment or general come-on-man. Even if Mt. Gox makes it out of bankruptcy with a billion dollars, even if he beats the embezzlement charges, it just seems too improbable that he'll walk the tightrope at the end of which is a billion dollars worth of bitcoins just for him.

Uber.

Uber Technologies Inc. has finalized its deal with SoftBank Group Corp. in which a SoftBank-led group will "invest up to $1 billion in Uber and proceed with a tender offer in coming weeks to buy up to $9 billion in shares from existing investors." The $1 billion direct investment will be "at the company's current valuation of nearly $70 billion," while the $9 billion tender offer to existing investors will be at a market-determined price. If it comes in at less than $70 billion, then in what sense is $70 billion "the company's current valuation"? Only in the unicorn-y sense that the valuation in your last fundraising round is your "current valuation" forever, which is not something anyone ever thinks in the public markets, but which I guess you can argue with a straight face if you remain private.

Delightfully the tender offer mechanics seem to have been hotly negotiated, but ultimately "SoftBank agreed to buy shares at a single price as long as sellers were barred from working together to push up the price," as Bloomberg News reports. "Benchmark has agreed not to work with other investors to prop up the price during the tender offer," says the New York Times. Obviously if you are a public company you don't even need to negotiate provisions like this; investors are just not generally supposed to collude to manipulate market prices. But in private companies, everything -- even this -- is a blank slate for negotiation. 

The deal also involves some governance changes, and cleans up some of Uber's messes:

As part of the deal, venture capital firm Benchmark agreed to put its lawsuit against Uber co-founder Travis Kalanick on hold and drop the complaint when SoftBank’s investment and the governance reforms kick in, the people said. Kalanick is agreeing to give Uber’s board majority approval over the board seats he controls should he ever need to fill them again, the people said.

And my Bloomberg Gadfly colleague Tim Culpan writes about SoftBank's Masayoshi Son as a "unicorn veterinarian":

Any trepidation Silicon Valley VCs have toward SoftBank's Vision Fund sucking up the best opportunities, and raising prices, can be mitigated. Instead of being the over-funded Goliath bidding up the cost of new investments, venture capitalists can look to the Vision Fund as a lucrative exit strategy for when traditional channels like IPOs or M&A don't pan out.

My view, as you know, is that private markets are the new public markets. But there are still the -- old -- private markets. There are still smallish companies that raise smallish amounts of money from smallish groups of early-stage venture investors. It's just that when those companies mature and need money to grow and liquidity for those early investors, they no longer need to go public. There is plenty of money and liquidity in the private market. You don't need to do an initial public offering when you can just do a SoftBank round for yourself, and a SoftBank tender for your investors.

Hinterlands.

When I used to work at Goldman Sachs Group Inc. building convertible bonds and corporate equity derivatives, I was responsible for a handful of coal companies, one of which seemed like a promising convertible issuer. So the bankers who covered the company kept asking me to come out for a visit, which would have required three flights on planes of ever-diminishing size and reliability to bring me to a tiny airport in coal country so I could pitch a convertible deal. I managed to put off this trip a few times, and then I quit. Did I quit because I didn't want to take all those turboprop flights? Well, not exactly. Not explicitly. Not just because of that. But it did feel really good not to have to do it.

Anyway here is a story about how Goldman bankers "are fanning out across the U.S. and Western Europe as part of a new plan to drum up additional business," and "targeting smaller companies, many in America’s hinterlands, ingratiating themselves to a tier of clients often neglected by Wall Street’s white-shoe advisers."

Goldman Sachs plans to offer “middle market” companies a full suite of services, from providing advice or arranging financing, all the way to investing its own money. It’s also asked senior bankers to search for smaller companies in need of growth capital.

Eventually Goldman's online retail bank is going to offer free checking, and then the bankers can pitch that to their seatmates on the planes to those middle-market meetings. They can bring some toasters in their carry-ons as account-opening gifts. Efficiency! There are two basic moves that a bank can make to tweak its targeting:

  1. Cut out its lowest-margin clients to focus on the biggest, most profitable and most high-likelihood business; or 
  2. Fling bankers out across the country to try to pick up some more low-probability small-ticket deals.

Both of these -- focused and premium or broad and high-volume -- are perfectly plausible strategies, but I have to say, when you read about a bank executive saying that the bank will do a review of its client relationships to make sure it is focusing on the profitable ones, as a banker, that is rather soothing. Yes, right, fewer wild goose chases! When you read that your boss "has lists with about 10 percent to 15 percent more companies on them than those currently on the bank’s roster" -- and that " clients who have been languishing at the bottom of a banker’s coverage list may get reassigned and receive more attention" -- that is more nerve-racking. The bottom of your client list is sort of by definition the worst place to spend your time. Now you'll be spending more of it there.

Market structure.

I would have thought that, if robots were threatening to take your job, the right move was a sort of John-Henry-style commitment to just outwork the robots. Sure the robots can do millions of calculations per second and never need to sleep or go to the bathroom, but old-fashioned human gumption and stick-to-it-ive-ness has to count for a lot, right?

Or you could just lobby for a longer lunch break I guess? Singapore's stock exchange got rid of its lunch break a few years ago, and traders complained, and now the hour-long break is back:

“It’s a relief that we managed to get our lunch breaks back,” said Ernest Lim, a 36-year-old commission-based equity trader at CIMB Securities Singapore Pte. “In our high-pressure jobs, it does us -- especially the more active and hardworking remisiers -- and our clients good if we can eat in peace and reinvigorate ourselves.”

Yeah look I get it, I can see why you'd want to say that it's good for clients if you can take an hour off for lunch, but you're not seeing the big picture. The clients' choice, ultimately, is not humans with lunch breaks or humans without. It's humans with human needs and human infirmities versus computers without. Admitting weakness -- like the need for lunch -- probably doesn't help the humans in the long run.

Things happen.

GE’s New Chief Sets Focus on Three Key Units. Citigroup’s Credit-Card Growth Plans Hit a Snag. Behind the Lucrative Assembly Line of Student Debt Lawsuits. Apple Inc.'s derivatives value-at-risk is $434 million, "similar to the combined VAR of the world’s top ten investment banks." Brookfield Property Makes $14.8 Billion Offer to Acquire Remainder of GGP. The U.S. Yield Curve Is Flattening and Here's Why It Matters. Trump Administration to Bankers: You’re Not the Villain Anymore. JPMorgan Says Family Awarded $8 Billion Deserves Nothing. Billionaire Chinese Actress Banned from Securities Markets. Surveillance Cameras Made by China Are Hanging All Over the U.S.. Hamptons Homebuyers Have Already Figured Out How to Game the Tax Plan. Villain markets. "When Steadman died in 1997 at age 83, he left behind a string of breathtaking losses that had earned him the nickname the 'Rembrandt of Red Ink.'" 

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    To contact the author of this story:
    Matt Levine at mlevine51@bloomberg.net

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