US court rules in favor of Citgo bondholders: Update 2

Adds detail.

A US federal court in New York today upheld the validity of defaulted Venezuelan bonds that pledged more than half of the country's US refining subsidiary, Citgo, as collateral.

US district judge Katherine Polk Failla's decision in favor of Venezuela's creditors does not immediately imperil Venezuelan control of the 760,000 b/d refining company. But the finding — that US support of stable bond markets trumped Washington's support for Venezuela's opposition government — leaves Citgo's ownership to appellate courts and White House decisions regarding sanctions.

"Venezuela has no power, save by the actions of this court or intervention by the United States, to stop defendants from enforcing their contractual remedies," Failla said. "And it is that impotence to complete the expropriation that makes clear that no taking has taken place in Venezuela."

Citgo and its US holding company, PdVH, declined to comment. Bondholder representatives could not be reached for comment.

Bondholders and companies seeking compensation for assets Venezuela expropriated roughly a decade ago have raced through US courts to claim rights to shares of Venezuela's US refining subsidiary, one of its most valuable overseas assets.

Failla reviewed dueling lawsuits between the US-recognized Venezuelan shadow government under National Assembly leader Juan Guaido and lenders who participated in a 2016 bond swap controlled by President Nicolas Maduro's government.

Guaido's government defaulted last October on $842mn in principal and $72mn in interest backed by a 50.1pc ownership interest in Citgo. The shadow government sued last October to have the bonds declared invalid. Venezuelan law required that the National Assembly approve the 2016 swap replacing PdV bonds that matured in 2017 and were close to default, they argued.

Ruling recognizes opposition

Failla's decision recognized the National Assembly as Venezuela's sovereign power dating back to 2015, when Maduro was still the US-recognized president of Venezuela. Bondholders had argued that Guaido and the National Assembly's authority began with his recognition in January 2019, and that retroactive recognition only applied to cases of a protracted revolution or other conflict with extended periods of uncertain control. The decision meant that contested National Assembly resolutions denouncing the bond swaps legislators passed in May 2016, September 2016 and October were acts of a foreign sovereign to which US courts generally defer.

That ultimately did not matter, though, because the resolutions did not plainly reject the bonds and because the debt and refining collateral were all executed in the US, the judge ruled. The assembly resolutions clearly applied to contracts with the "National Executive", not PdV, the judge said. The court found little support that the absence of explicit national assembly approval of the bonds also qualified as an act of a foreign sovereign, as the Guaido government had argued.

Venezuela's representatives "have sought to transmogrify ambiguously worded 2016 resolutions into judicially enforceable takings via the magic of 2019 hindsight," Failla said.

"Given the plain language and clear chronology of the resolutions, there is no basis for the court to find that the national assembly, through those resolutions, prevented the 2020 notes and governing documents from coming into existence," Failla wrote. "The court cannot stretch these earlier resolutions to accommodate plaintiffs' current arguments."

The case could have instead turned on a direct US government request to protect the assets of its recognized government. US reluctance to argue for a specific outcome in either case has frustrated judges wading through the morass of sovereign debt, contract law and geopolitical questions. Failla upbraided a US attorney during a September hearing for restating the legal arguments instead of taking a position on the case.

"Are you really going to sit on the sidelines, sir?" Failla asked.

US State Department special envoy on Iran and Venezuela Elliott Abrams had warned in a letter to the court that the loss of Citgo "would be greatly damaging and perhaps beyond recuperation" for US foreign policy goals. But the US government also noted in filings the importance of preserving laws governing contracts and bonds.

Ruling for the Guaido government would risk New York's status as a global center of finance, the stability of financial markets and invite more actions by "less honest foreign governments" to expropriate funds from creditors, Failla said.

"Such a reality, in the court's carefully considered view, presents just as great a risk of embarrassing the United States as opening the door to the defendants' sale or purchase of Citgo," Failla wrote.

Washington has preferred instead to rely on more direct executive branch authority over Venezuelan assets in the US. US sanctions imposed on Venezuela's oil sector in support of a Guaido-led national election and transition of power require Treasury Department approval of any efforts to sell Venezuelan assets in the US to satisfy court judgments or bond defaults. The US earlier this month extended to 20 January a block on any seizure of Venezuelan property.

Whoever voters elect in November could still intervene.

The New York case will proceed with, within 45 days, bondholders filing a calculation of the interest associated with the roughly $1.7bn owed to bondholder MUFG. The case will almost certainly enter an automatic stay and then proceed to the US 2nd Circuit Court of Appeals. Venezuela is losing its grasp on Citgo, but all parties will see the company slip away in very slow motion.

By Elliott Blackburn