Oh! What A Tangled Web: Venezuela's debt restructuring conundrum, Part III.

AuthorKargman, Steven T.

Any eventual Venezuelan restructuring is threatened in advance of the process by litigation brought by creditors against the Republic of Venezuela and PDVSA, Venezuela's state-owned oil company. This is the third in a series of articles on Venezuelan debt restructuring. The first installment of this series, in the Fall 2018 issue of TIE, discussed a two-sided conundrum facing Venezuela: first, the fact that Venezuela urgently needs a restructuring but such a restructuring is unlikely to take place while the Maduro regime remains in power; and, second, that a delay in initiating a restructuring is only likely to make success more difficult to achieve. The second article, in the Spring 2019 issue of TIE, focused specifically on the challenges posed by a deteriorating economy in general and a declining oil industry in particular for an eventual Venezuelan restructuring.

RECENT DEVELOPMENTS

Since late June, a number of major developments have had bearing on the Venezuelan situation. In early August, the Trump administration expanded on its earlier program of sanctions against Venezuela by imposing a freeze on all Venezuelan government assets in the United States. This latest step continues the Trump administration's efforts to ratchet up the economic pressure on the Maduro regime in order to bring about regime change in Venezuela.

In the meantime, Venezuela has increasingly turned to outside sources such as Russia to fill its domestic energy needs, particularly for refined products such as gasoline. Venezuela has been facing severe fuel shortages due to the impact of U.S. sanctions, which cut off imports of gasoline and other refined products from the United States. Rosneft, the Russian state-owned oil company, has apparently entered into transactions with the Venezuelan government to supply gasoline and other refined products, and a Chinese engineering firm has reportedly been brought in for the purpose of repairing Venezuela's ill-maintained domestic refineries.

Separately, in a major ruling, the U.S. Court of Appeals for the Third Circuit upheld a decision of the U.S. District Court of Delaware in late July that, given the Venezuelan government's extensive degree of control over PDVSA, PDVSA is effectively the "alter ego" of the Republic of Venezuela, and thus the formal separateness of the two entities, the Republic and PDVSA, could therefore be disregarded. The Third Circuit also held that a judgment against the Republic could be satisfied by allowing the judgment creditor in that case, Crystallex International Corporation, to attach PDVSA's shares in PDV Holding, the U.S.-based wholly owned subsidiary of PDVSA. Since Citgo Petroleum Corporation, arguably PDVSA's most valuable asset, is an indirect, wholly owned subsidiary of PDV Holding, attaching shares in PDV Holding could give Crystallex a potential path to seize shares of Citgo.

This decision, unless it is overturned on appeal, could have important implications for creditors seeking recoveries against the Republic as it potentially opens up the possibility of going after PDVSA-related assets in the United States to satisfy judgments.

In another recent development, in early July both the so-called interim government (led by opposition leader and National Assembly President Juan Guaido) and a committee of bondholders set forth their respective views on some general principles and parameters to guide any eventual debt restructuring. There was some convergence between the two sides on matters such as the principle of equality of treatment for all creditors, but there were also some apparent differences as well. The Guaido-led opposition indicated that it would plan to negotiate separately with China and Russia with respect to the bilateral loans from those two countries, while the committee of bondholders stated that China and Russia should not be given any special treatment.

On the political front, the stalemate between the Maduro regime and the Guaido-led opposition forces has appeared to continue, and the Maduro regime remains in power after having put down an attempted uprising by the opposition forces in late April. In early August, the Norway-sponsored talks taking place between the Maduro regime and the opposition concerning a possible political settlement in Venezuela reportedly broke off, at least for the time being, after the Maduro government withdrew from the talks. However, it was reported in late August that the U.S. government has been...

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