Venezuela has missed $4.5bn of coupon payments on bonds issued by the sovereign and state-owned oil giant PDVSA. But it has continued to make coupon payments on PDVSA’s 8.5% 2020 note.
This is likely because these bonds, the product of a 2016 exchange, are secured by a majority stake in Citgo — the US refinery owned by the Venezuelan government.
While Venezuela’s sovereign curve and PDVSA’s other dollar bonds trade anywhere between 20-30 cents on the dollar, the PDVSA 2020s are bid at 85.5.
Even after defaulting on other bonds, PDVSA found the funds to make a last-minute $985m amortisation payment in October. Venezuela’s government, therefore, clearly fears the consequences of defaulting on the bonds and losing control of Citgo.
Yet US sanctions against Venezuela left bondholders unsure that they would be able to claim the collateral should PDVSA default on the notes.
Executive Order 13835, issued by US president Donald Trump on May 21, prohibits US persons from being involved “in the transfer by the government of Venezuela of any equity interest in any entity owned 50% or more” by the government, according to OFAC.
Given the apparently very real possibility that Venezuela will also default on PDVSA’s 2020s, bondholders asked OFAC to clarify whether the executive order would prevent them from claiming the collateral and enforcing their rights to Citgo shares.
OFAC closed this loophole and gave bondholders some relief last week by issuing General License 5, which enables US persons to engage in all transactions related to the 2020s that would have been prohibited by the executive order. In other words, bondholders would not be barred from accessing their collateral.
“Authorising bondholders to enforce rights related to the PDVSA 2020 8.5% bond prevents the Maduro regime from using the executive order to default on its bond obligations without consequence,” said OFAC.
This licence “keeps sanctions pressure where it belongs — on the Maduro regime”, said OFAC.
The bonds in question did not budget from their 85.5 bid price after OFAC’s news.
Furthermore, OFAC said it would consider licence application seeking to attach and execute against Venezuelan equity interests on a “case-by-case” basis, suggesting any other loopholes that emerged would be swiftly closed.
Citgo’s CEO Asdrubal Chavez, a cousin of late Venezuela president Hugo Chavez, had his visa to the US revoked last week, the company said, without giving reasons.