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Venezuelan Opposition Files Legal Action Against PDVSA Bondholders

The Venezuelan opposition led by Juan Guaidó has filed a lawsuit against the holders of a bond issued by the state oil company PDVSA, demanding the cancellation of the debt.

He says creditors have no right to seize PDVSA’s 50.1% stake in Citgo, the Texas-based oil refiner, which serves as collateral for the bond.

The opposition has been given control of Citgo by the Trump administration in a bid to bolster its financial firepower in its battle to overthrow the regime of President Nicolás Maduro.

But Citgo’s control included the burden of servicing PDVSA’s debt. The opposition missed a $913 million payment on the bond on Monday.

The lawsuit comes days after the US government extended an eleventh-hour lifeline to Guaidó’s team, temporarily shielding Citgo, the crown jewel of Venezuela’s oil industry, from seizure. by creditors. The opposition, recognized by the United States and nearly 60 other nations as the legitimate government of Venezuela, had indicated before the payment deadline that it would not be able to honor the bond, which will expire l ‘next year.

Without the US Treasury Department’s protective measure, which prohibits bondholders for 90 days from collecting collateral tied to the bond, creditors could have filed a claim against Citgo.

The opposition-controlled ad hoc board of PDVSA, which is a plaintiff and filed a lawsuit against MUFG Union Bank, the trustee of the bonds, in the U.S. District Court for the Southern District of New York, claims the debt is illegal because the government led by Mr. Maduro did not seek permission from the opposition-controlled Congress to issue the debt and use Citgo as collateral.

Legal experts and investors have pushed back against that argument, warning it may not hold up in US court.

“They have to recognize that it’s a long way off,” said Mitu Gulati, a law professor at Duke University in Durham, North Carolina and a sovereign debt expert. “They are really playing. . . The creditors gave them money and got the fair and square guarantee.

Cecely Hugh, an investment adviser at Aberdeen Standard Investments, said although the issue is ‘difficult’ and the claim is by no means ironclad, she said it could give the opposition some leverage in negotiations. with creditors.

“The proposed claim in the New York courts may be an attempt to threaten 2020 bondholders with a possible route to debt repudiation . . . in order to gain an advantage in settlement negotiations with these bondholders” , she said.

An emerging market debt investor agreed, saying the strategy could work for Guaidó’s team because it saves them time and disrupts bondholders’ plans. Still, the investor said such a claim was unlikely to be considered legal in a US court.

London-based Ashmore Group, BlackRock and T Rowe Price are the main holders of PDVSA 2020 debt.