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Creditors of Pdvsa 2020 Bonds will have to wait until January 2021 to continue with their collection actions

The New York Court confirmed the validity of the 8.50% Senior Secured Notes due 2020.

This decision evidences the state-owned oil company's failure to pay its creditors and maintains the financial protection of Citgo Holding.Therefore, those affected will have to wait until January 19, 2021 to continue the execution of measures that may affect the capital stock of Citgo, in view of the pledge that exists on shares of such company, offered to guarantee the payment of the securities.

On that date will expire the 5E License issued by the Office of Foreign Assets Control (Ofac)The U.S. Treasury Department granted the referred protection. The U.S. administration has allocated part of the sanctions against Venezuela to the plan of adding pressure to the Venezuelan government, in order to prevent bond creditors from taking action for the time being.

The court decision is in response to the lawsuit filed by the opposition group to the Venezuelan government, headed by citizen Juan Guaidó, which argued that the PDVSA bonds were invalid because they had not been approved by the National Assembly. 

In a previous article published in this blog we analyze the invalidity argument, based on the interpretation of the applicable constitutional norms. For Guaidó's group, the bond swap represented in 2017, by the time of the swap, a higher indebtedness for the country, so they rejected its implementation. However, in April 2019, the Parliament authorized the payment of interest accrued on the securities. Then, six months later the Assembly agreed to ratify that the issuance of the 2020 bond violated the provisions of Article 150 of the constitutional text: 

"The execution of contracts of national public interest shall require the approval of the National Assembly in the cases determined by law. No contract of municipal, state or national public interest may be entered into with foreign States or official entities or with companies not domiciled in Venezuela, nor may it be transferred to them without the approval of the National Assembly.

The law may require in public interest contracts certain conditions of nationality, domicile or otherwise, or require special guarantees".

However, in the previous analysis of the situation, there were legal arguments that the bond issue did not have to be subject to parliamentary approval.In this case, it is not a public interest contract and PDVSA was free to issue or substitute the pre-existing debt, pursuant to Article 101 of the Organic Law of the Financial Administration of the Public Sector (Ley Orgánica de la Administración Financiera del Sector Público).

The decision of the New York Court evidenced that the issuance of the Pdvsa 2020 bond did not require the authorization of the National Assembly.. In our opinion, pressure from Crystallex to take action against Citgo in response to the favorable arbitration decision will continue in the legal scenario of this case.. However, we consider that as long as the protection of the aforementioned License is maintained, there is the possibility of preserving the ownership of the assets that make up the North American refinery. OFAC administers several different sanctions programsThese can be broad or selective, through the blocking of assets and trade restrictions, to achieve U.S. foreign policy and national security objectives. 

The Pdvsa 2020 bond discord

The security commonly referred to as the 2020 BondThe Senior Notes, was issued in 2017 in substitution or exchange of the 5.250% Senior Notes maturing in 2017 and the 8.50% Senior Notes maturing in 2017. In its design, it was decided to grant as collateral 50.1% of the shares of Citgo Petroleum Corp, however, the commitments with the bond creditors ceased to be fulfilled that same year. Two years later, the Pdvsa 2020 bond officially defaulted. 

The opposition group led by Juan Guaidó considered the decision unfair. taken by the New York Court and will evaluate all legal options in its favor.

At Alan Aldana & Abogados we have specialists in the legal-financial area to provide specialized advice regarding the execution of these bonds and other securities issued by the Bolivarian Republic of Venezuela and its companies.

Sources consulted