Court studies timeline of Venezuelan bonds

A federal judge today probed how far back to recognize the Venezuelan opposition's authority in a dispute over the validity of defaulted bonds backed by the country's US refiner Citgo.

Judge Katherine Polk Failla pressed bondholders and representatives of Venezuela's opposition-controlled PdV over how to treat debt issued by Venezuelan president Nicolas Maduro in 2016. When does a court accept the decisions of an opposition government recognized by the United States — at the time of its formal support by the US government or in prior years when struggling for control?

Opposition counsel pointed to National Assembly efforts beginning in 2016 to wrest authority from Maduro over the issuance of Venezuelan debt. Bondholders cited the global recognition of Maduro at the time, as well as consistent payments by both Maduro and opposition administrations until last year. The legal implications for the bondholder debt between 2016 and 2019 was murky without more explicit language from the Venezuelan legislature.

"It does seem as though the National Assembly was making it up as they went along," Failla said.

A board reporting to Venezuelan president Nicolas Maduro issued in 2016 a $3.4bn obligation backed by 50.1pc ownership of Citgo. The US-recognized opposition government halted payments on those bonds last year, ten months after National Assembly leader Juan Guaido declared himself interim president and the US imposed sanctions on Venezuela's oil industry to help remove Maduro from power.

The Guaido government sued to invalidate the debt, arguing Maduro's PdV issued it illegally without the consent of the National Assembly. Bondholders note this was a new interpretation of the legality of the bonds Venezuela paid for two years and did not challenge in 2016. New bonds that the Guaido government issued last spring as part of a similar refinancing were not approved by the National Assembly.

Bondholders argued that the opposition did not control the government and were not recognized by the US government or its courts until January 2019. The court should follow the understanding of both bondholders and Venezuela at the time.

Deferring to US policy was "not a free-floating offramp to permit a foreign sovereign to expropriate property," bondholders argued.

Failla repeatedly pressed the US government to take a clearer stand on what it wanted to happen in the case. The court delayed this hearing in late July. US State Department special envoy on Iran and Venezuela Elliott Abrams told the court that the loss of Citgo "would be greatly damaging and perhaps beyond recuperation" for US foreign policy goals. But the Department of Justice offered no arguments on how to address the legal implications of the validity of the contract or bonds.

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

The US could be more involved if the case moved to judgment, the attorney for the US government said. Underlying sanctions restrictions blocking any execution of the default also give the US government more options than stepping in with legal arguments to the case.

"We are not expecting a second bite at the apple, so to speak," the government said.

Judges this summer pressed the US government for clearer guidance on Citgo's legal peril. The refiner also faces claims from holders of arbitration claims for property expropriated by the Venezuelan government roughly a decade ago.

"US government is quite restrictive in interfering with contract regulations domestically," said Duke University law professor Mitu Gulati, a sovereign debt expert. "But the exception is when it is a matter of national security involving a foreign country that is important."

The administrations of Presidents Ronald Reagan and Jimmy Carter stepped in to cases to address foreign policy and national security concerns with China and Iran. Executive involvement was even more common before the 1950s. But administrations gave clear requests to judges in those cases.

By Elliott Blackburn