Venezuela’s Debt Restructuring: An Alternative Path

Cleary Gottlieb partners Richard Cooper and Ignacio Lagos and associate Sean O’Connell co-authored the article, “Venezuela’s Debt Restructuring: An Alternative Path,” published by the Harvard Law School Bankruptcy Roundtable.

On June 24, Venezuela was hit by two of the largest earthquakes to affect the region in a century, resulting in tragic loss of life, widespread pain and suffering, and extensive devastation. As the people of Venezuela seek to recover, few would question Venezuela’s decision to pause its previously announced debt restructuring process. In addition to the human toll the earthquakes have generated, there is a clear need to prioritize providing food, shelter and basic services to those affected, and to understand the financial implications of these devasting earthquakes and their impact on Venezuela’s future investment needs.

But the decision to pause a debt restructuring process is not necessarily a straightforward one.  On the one hand, Venezuela’s desire to move ahead quickly is understandable. Venezuela’s debt is unsustainable and a clear impediment to the new investment it requires. The government wants to show prospective investors that there is a path to a restructuring, and they need not wait to make the critical investments that are required to restore the productive resources of the Venezuelan state.

On the other hand, the accelerated and unconventional restructuring process that Venezuela laid out in May is hardly a sure thing: it could end in failure that delays new investment and diminishes the credibility of those involved. Or it could succeed on paper but leave Venezuela with an unsustainable debt load, which is likely to lead to a subsequent restructuring. Neither result would be good for the Venezuelan people. 

The risks of moving forward too rapidly are real. Venezuela’s debt stock is unusually fragmented, and the origin and validity of its liabilities have not been assessed in the manner required to ensure stakeholder confidence. Further, much of Venezuela’s debt lacks sufficient contractual machinery to control holdout litigation, which could derail or undermine achieving the ultimate objectives of any restructuring.

But the decision to delay a debt restructuring process indefinitely or move forward quickly need not be a binary one.  We believe there is another path that can advance the aims of a restructuring, and create the essential building blocks for a future debt restructuring, while avoiding the risks of a failed or counterproductive process.

Instead of choosing between a potentially fast but uncertain restructuring process and a more deliberate but credible one, Venezuela could instead begin its restructuring with a thorough  claims-reconciliation exercise and, as that is underway, proceed to restack its debt stock so it is set up to achieve a comprehensive debt restructuring that is less vulnerable to subsequent renegotiation or legal challenge. Claims would be validated and then exchanged into new instruments, so-called “mirror bonds”, featuring proper anti-holdout contract tools. Participation would be encouraged through Brady Bond-style enhancements, which could be financed through a number of mechanisms, including by collateralizing those mirror bonds with revenues that accumulate on Venezuelan oil sales managed by the United States.  As a condition to participating in the mirror bond exchange, participating creditors could be expected to require that some basic guardrails are incorporated into the process such that the claims pool is not inflated by invalid claims of dubious origin and any debt sustainability analysis is the product of credible data, realistic assumptions, and thoughtful expert analysis.

Such a transaction would not, in and of itself, reduce Venezuela’s balance sheet debts. But it would do something almost as important: create the conditions for a successful debt reduction down the road. That ultimate restructuring can then occur once the in-depth claims reconciliation process is completed, a credible debt sustainability analysis has been generated, and the necessary legal reforms and changes in political conditions have occurred or are close at hand.

In a matter of months, Venezuela could transform its creditor landscape into one capable of supporting an orderly debt restructuring, while demonstrating to investors, creditors, official lenders, and the IMF that the process rests on a credible foundation.

A False Paradox

At first glance, Venezuela faces a stark choice when it comes to selecting the best path to restructure its debt.

The first is characterized primarily by speed. Venezuela launches a restructuring immediately based on incomplete and unvetted information, seeks to secure debt relief quickly, and hopes that the economy expands rapidly and any unresolved creditor issues can be managed later. This seems to be   the path Venezuela was set to proceed down before the earthquakes. On May 13, 2026, the interim government announced it would be pursuing a “comprehensive debt restructuring” encompassing both Republic and PDVSA debt. It added that Venezuela would have an internally-generated “macroeconomic framework and public debt sustainability analysis” ready by June, with the aim of completing a restructuring “as expeditiously as possible.”

The market reacted hesitantly, with some describing Venezuela as putting “the cart before the horse.” The concern was not that a debt restructuring was imminent, but that Venezuela risked tripping over itself in an effort to cross a self-imposed restructuring finish line.

The second path is characterized by credibility. Venezuela undertakes a more traditional sovereign debt restructuring process, involving a rigorous debt sustainability analysis led by the IMF with accompanying official sector reforms reflected in a debt sustainability analysis (“DSA”), a thorough claims reconciliation process, extensive creditor consultations, and engagement with new money investors to expand its valuable resource sectors. The result is more informed decision making and durable debt relief, but it could take several years to get Venezuela from restructuring to restructured.

The paradoxical framing between these two restructuring paths is, however, illusory. Venezuela does not need to choose speed or credibility. It needs a process that can deliver both.

Before Restructuring the Debt, Restructure the Debt Structure

The central problem facing Venezuela’s restructuring ambitions is not just the size of its debt stock. It is also the structure of the debt stack.

Based on some estimates, about $60 billion (excluding past-due interest) of Venezuela’s debt is held in the Eurobond market, and even this is divided between PDVSA bonds and bonds issued directly by the Republic. The remainder is dispersed widely between bespoke instruments, including arbitration awards, legal claims, commercial trade claims and oil debts, and a range of obligations to countries like China, Iran, and Russia. Much of the individual commercial claims and bilateral debt are not evidenced by traditional financial indebtedness, and commentators have raised questions about its origin and legal basis.   

Even among bond claims, the contractual architecture of Venezuelan debt complicates its restructuring outlook. Venezuela’s sovereign bonds largely rely on voting provisions that permit individual bond series to block the acceptance of a comprehensive restructuring proposal. Most modern sovereign bonds have abandoned these clauses in place of stronger cross-aggregation collective action clauses (“CACs”) that make widespread non-participation difficult. Many PDVSA bonds contain no collective restructuring mechanism at all.

This is a recipe for fragmentation and delay. Moreover, any partial restructuring that could be achieved would likely set the “floor” for future settlement efforts, and the nature of Venezuela’s debt stack is such that there is a substantial risk that one-off settlements (which would become more expensive to settle as these claims accrue at high contractual rates) would favor creditors with influence and access. Hence, there is a need for Venezuela to restructure not only its debt but also its debt structure.

Validate First

How can Venezuela solve the problems of claim disparity, creditor dispersion, and litigation risk while introducing a sense of progress, purposefulness, and credibility into its restructuring? The first step is for Venezuela to engage in a rigorous claims validation and reconciliation process, led by an internationally recognized and independent advisor.

Validating and reconciling debt claims may sound mundane. In this case, it is not.

Venezuela and PDVSA bonds have been in default since 2017, and many other obligations, such as the warrant-like OIPOs and bonds of its electricity company Corpoelec, have tenures stretching back nearly three decades. Before discussing recoveries, therefore, Venezuela needs to know and verify precisely who is owed what, what is the factual and legal basis for the claim, whether there are valid defenses (and appropriate evidence) for such claims, and what are the assumptions behind  the amount of the claim that is being asserted. This requires that claims be substantiated by disinterested, independent accounting and legal experts using objective criteria and a set of common assumptions.

A disciplined validation and reconciliation exercise would reassure creditors that the restructuring process is being conducted transparently while also showing Venezuelans, creditors, and other parties that illegitimate claims will not be paid simply because they are asserted  by  stakeholders with access and influence. A thorough validation process would also establish credibility with the local and international institutions that will eventually need to support Venezuela’s recovery.

A Stabilization Exchange: Swapping into Mirror Bonds

Validation and reconciliation alone, however, are unlikely to be sufficient.

Once the claims reconciliation process is underway, Venezuela and PDVSA could then invite bond holders to exchange their existing instruments into a standardized set of new obligations.

Such an exchange could be structured such that new mirror bonds could also be issued to holders of other validated claims, including judgement and arbitration award holders and verified commercial claims holders, in each case contingent upon those claims undergoing the rigorous validation process described above.  Given the liquidity uplift these non-bonded claims holders would obtain through receiving new mirror  bonds, we would expect that any exchange of those claims into new mirror bonds would occur at a discount to the settlement amount of those verified claims.

The purpose of the exchange would not be debt relief in the traditional sense. Existing claims would largely preserve their existing terms, including payment terms, priority rankings, and governing law, though there could be a defined  period of time after issuance where the bonds would accrue but not be paid cash interest (perhaps tied to the targeted time it would take to agree to the comprehensive restructuring). The goal of an exchange into “mirror bonds” would be stabilization.

Such an approach has several benefits. Participation would effectively confirm the validity and amount of a creditor’s claim. Creditors in return would replace their previously defaulted bonds with current mirror bonds under a refreshed and extended statute of limitations. The offer of holding non-defaulted, potentially index-included debt instruments would be a significant advantage from a  liquidity and pricing perspective, as some investors cannot hold defaulted debt.

We would expect holders to  insist on additional protective conditions to participate in the exchange.  Creditors might require that they be given a meaningful opportunity to comment on Venezuela’s eventual macroeconomic assessment and debt sustainability analysis, or insist on a different DSA process altogether (perhaps similar to the one Puerto Rico undertook in 2015 as part of its debt restructuring process where it brought in a team of ex-IMF officials to perform its DSA). Holders might also seek some  basic protections over the process pending the ultimate restructuring, including that Venezuela’s claim pool not be inflated by settling claims  that have not been independently  verified and validated.  

Notably, the stabilization exchange into these mirror bonds would replace Venezuela and PDVSA’s fragmented contractual architecture with modern cross-aggregation CACs, including the anti-Pacman provisions negotiated after the 2020 Argentina restructuring. By potentially exchanging other verified claims with mirror bonds, Venezuela would be setting itself up for a future successful debt restructuring that extends beyond its bonded debt.

Rather than merely adopt the standard ICMA framework for cross-aggregation CACs, the new instruments could  permit a supermajority of mirror bond holders across the entire debt stack (both Republic and PDVSA debt and even non-bonded debt exchanged for a separate series of mirror bonds) to approve a restructuring that would be binding across the full set of newly exchanged mirror bonds. Such ambitious cross-aggregation language would not be unprecedented. Pemex bond documentation already contemplates voting and amendment mechanisms tied to a broader restructuring of Mexico’s sovereign debt.

In one step, Venezuela’s stabilization exchange could achieve two objectives. It would complete a substantial portion of the traditional claims-reconciliation process that lends an air of rigor to any sovereign restructuring. And it would dramatically reduce the holdout risks that plagued sovereign restructurings for decades. The result would be a creditor group capable of negotiating with Venezuela to achieve a future comprehensive restructuring on an orderly basis.

A stabilization exchange would also show creditors and new money investors that Venezuela is  serious about an eventual restructuring that respects fair recoveries and comparability of treatment,  and recognizes commercial contract rights. Further, it would demonstrate that there is a credible and transparent process underway to clear up Venezuela’s distressed debt stack and provide a path forward where new investment would not be subject to attachment and other risks from disgruntled creditors.

There is yet another reason to favor such an exchange. Creditors are often reluctant to grant large debt concessions to a government whose permanence remains uncertain. They may ask whether a future administration will embrace the same economic policies, maintain the same institutions, or honor the same commitments, as well as whether foreign governments and courts will do the same.

A stabilization exchange mitigates that very real concern. It asks creditors to support Venezuela’s restructuring process rather than negotiate a determinative debt recovery. For the interim government, this may be a more attainable objective than seeking to complete  a comprehensive restructuring prior to a future election. If the interim government were to adopt this path, we see no reason why it would not be supported by all stakeholders in Venezuela, including the opposition, as it would lay the groundwork for a successful restructuring for any future government, whatever its political affiliation.

A Lesson from the Brady Era

A natural response from creditors might justifiably be: why exchange my existing claims for mirror bonds on the same terms but that simultaneously provide Venezuela with more effective debt restructuring tools?

One answer may be found in one of the most successful sovereign debt innovations of the last half-century.

During the Latin American Debt Crisis of the 1980s, creditors of various sovereigns (including Venezuela) agreed to exchange their troubled bank claims for bonds partially secured by U.S. Treasury obligations. The attraction for participating was simple. Creditors received enhanced security on the new bonds (in the form of U.S. Treasury collateral) in exchange for accepting a new debt’s framework (in that case, former bank loans were sold into the market as newly minted Eurobonds).

A similar securitization logic could apply to Venezuela’s stabilization exchange today, and recent geopolitical developments once again create an unusual opportunity to align U.S. and Venezuelan interests.

The Trump Era -Brady Bond

Under Executive Order 14373 passed this January, revenues from Venezuelan oil sales in the United States are accumulating under Treasury supervision and protection. A portion of the future revenues from these funds could be mobilized to support a modernized Brady-style structure.

Under this approach, creditors participating in Venezuela’s stabilization exchange would receive mirror bonds whose near-term interest payments would be paid in kind (perhaps tied to the expected timeline to renegotiate and implement a comprehensive restructuring and to  maximize short-term funding for humanitarian recovery purposes), but such obligations would be partially collateralized by U.S. Treasuries, purchased by or on behalf of Venezuela with revenues protected under the Executive Order. Collateralization infrastructure could be further designed to have the portion of interest covered by the collateralization grow over time as Venezuela’s revenues increase.

This collateralization enhancement would not totally eliminate Venezuela’s credit risk or result in the acceleration of cash interest payments to creditors. It would, however, provide a meaningful incentive for creditor participation and a tangible demonstration of U.S. support for Venezuela’s economic recovery. It also would favorably impact trading values for the new mirror bonds, thus providing another benefit to creditors. Most importantly, it would transform the exchange into a transaction offering immediate value to participating creditors.

Beyond that, a debt collateralization would bifurcate Venezuela’s debt stock into two pools.

First, a pool of mirror bonds with cross-aggregated CACs which would be partially supported by U.S. collateral, providing greater liquidity and higher pricing to its holders, while simultaneously enabling the largest holders to take the lead in shaping a future restructuring. The exchange of these  mirror bond instruments in a subsequent comprehensive restructuring would  be the subject of future negotiation. We would not expect the collateralization feature to be part of the ultimate comprehensive restructuring, but rather to include fixed income instruments tied to Venezuela’s agreed debt capacity and value recovery instruments that would provide creditors enhanced recoveries as Venezuela’s economy improves.

Second, a pool of unexchanged, illiquid bonds and other claims whose contractual terms might also have been altered so as to become substantially less attractive to holders as part of the mirror bond exchange (through exit consents and other mechanisms). These claims would effectively reduce the overall size of Venezuela’s debt stock as they likely would be the target of further efforts to isolate and ignore them by a variety of means used in other sovereign restructurings.

To Stability and Beyond

To be clear, a stabilization exchange would not reduce Venezuela’s outstanding debts. Nor does it seek to do so—that is precisely its virtue.

Instead of pushing Venezuela into an accelerated restructuring before the necessary groundwork has been completed and in the midst of a humanitarian crisis, the exchange would buy time for Venezuela to complete a rigorous debt reconciliation process, perform a more thorough debt sustainability analysis, implement and refine its economic reforms, negotiate with official creditors, and develop a coherent economic recovery strategy. 

When the time of the restructuring arrives, much of the difficult work will already have been done. Claims will be validated. Debt instruments will be standardized. Holdout risks will be reduced. Creditors and their counterparties will be negotiating within a framework designed for resolution and transparency rather than conflict and confusion.

The debate over how best to pursue Venezuela’s restructuring is often presented as a choice between moving quickly towards an uncertain or potentially problematic outcome or following a traditional path and delaying any outcome for years.

It need not be so binary. A proper debt reconciliation and stabilization exchange could allow Venezuela to move quickly without sacrificing the need for rigor. It would provide tangible progress and put in place the structural pillars that will support a future restructuring. And it could be combined with other innovations, including incentives to encourage creditors to invest new money, next generation VRIs, and  blended capital techniques that  bring official and private  sector capital into segments of the economy where private capital is too expensive or difficult to access.

In sovereign finance, credibility is usually earned over time, sometimes over decades. By thinking a bit outside the box and adapting to what are clearly changed circumstances, Venezuela has an opportunity to earn credibility in a matter of months. That alone is reason enough to consider a change.