Venezuela’s opposition snubs PdV bondholders

The controversial PdV 2020 bond issued by Venezuela's national oil company PdV is collateralized by the firm's US refining unit Citgo, which is nominally in the hands of the Opec country's self-proclaimed interim president Juan Guaido, whose authority is recognized by Western countries, including the US.

PdV itself is still controlled by Guaido's nemesis, President Nicolas Maduro, who has resisted a Western diplomatic campaign and US sanctions aimed at removing him.

The bond obligates PdV to pay $842mn in principal and $72mn in interest on 27 October. The interest has a 30-day grace period, but the principal does not.

The opposition already paid $72mn in interest on the PdV 2020 bond in May, out of fear that the Maduro government would default and lose the asset.

Critics on Wall Street say the May 2019 interest payment casts doubt on the assembly's case against the legality of the debt.

The funds used by the opposition to pay the interest came from PdV's frozen US accounts that remain tightly controlled by the US Treasury. It is not clear how much money PdV still has locked up in the US, but the amount is not believed to approach what is required to satisfy the bond.

At the time of the May interest payment, Maduro's opponents brushed off precedent concerns, insisting that he would be ousted before the more daunting October obligation came due. With Maduro now still in power, the Guaido team had grappled for weeks over how to handle the looming debt payment. Lobbying efforts to persuade the White House to issue an executive order or tweak the sanctions to protect Citgo from seizure by creditors have fallen flat. And tentative talks with bondholders to renegotiate the principal did not yield any proposals "that would not compromise the national interest," a senior opposition figure told Argus.

Constitutional doubts

In a resolution approved today in Caracas, the assembly declared that the bond violates article 150 of the constitution because it was not approved by the legislative body as required for contracts deemed to be in the national public interest.

More controversially, the resolution goes on to declare that the PdV 2020 bond also violates constitutional articles 311 and 312 because its financial conditions are "harmful owing to the irrationality in which PdV structured the swap and subsequent issuance."

The bond was born out of a 2016 swap with bondholders, which at the time was lauded in a local television interview as a "very safe" bet by Alejandro Grisanti, a Venezuelan economist who is now a member of the opposition's ad hoc board of directors for PdV.

There was no immediate response from a creditors committee that represents large institutional investors that carry the bonds.

A financial sector executive close to the bondholders fired back privately that today's resolution is an effective repudiation of the debt, and maintained that the opposition case against paying "irrational" obligations would not be upheld in US court.

Longer term, critics said the move would hurt the opposition's future effort to rebuild Venezuela by alienating lenders. Reconstruction of Venezuela's ravaged economy and oil sector is estimated to cost as much as $200bn.

Among the Wall Street institutions holding the PdV 2020 bonds are Fidelity, T. Rowe Price, Blackstone and Ashmore.

In today's resolution, the assembly reiterated that it has repeatedly questioned the validity of all "irresponsible" debt in the national interest that lacks legislative approval, and noted that all such debt is subject to investigation, "including, among others, an agreement signed with Rosneft Trading."

Russian state-controlled Rosneft is the only company specifically mentioned in the new resolution. The firm has emerged as the leading lifter of Venezuelan crude in recent months, taking part of the supply as payment for oil-backed loans. Most other buyers have shunned Venezuela because of US sanctions issued in late January 2019, even though these have no direct secondary component. The sanctions also prohibit US companies from buying Venezuelan crude and any transactions from non-US companies that make use of the US financial system.