Foreign debt is a subject of significant debate in Venezuela, especially given the challenges faced by the Maduro government to meet its external obligations in the context of an economy that has already spent six consecutive years in deep recession and faces an increasingly meager flow of foreign currency due to the fall in oil prices (between 2014 and 2016) and ensuing collapse in oil production, difficulties in accessing financial markets, the erosion of the purchasing power of tax revenues due to hyperinflation, and internal political problems.

2019 is a particularly difficult year, since Venezuela must honor a total of U.S. $8,081.19 million(1) for external debt bonds, of which about U.S. $985 million(2) correspond to the payment of the PDVSA 2020 bond. The PDVSA bond is an instrument of particular importance since it has as collateral 50.1% of the capital of CITGO Holdings, Venezuela’s main physical asset abroad.

Background

In 2016, faced with liquidity problems due to low oil prices, the state oil company PDVSA sought to refinance its short-term debt through a bond exchange transaction to alleviate a depreciation profile that at that time was about U.S. $11,226 million(3) (of which U.S. $8,100 million corresponded to principal and $3,166 million to the payment of interest). The eligible titles matured in April and November of 2017, with face values of U.S. $3,000 million and U.S. $4,100 million and coupons of 5.25% and 8.25%. Citgo was offered as collateral. The estimated value of CITGO ranges between U.S. $8,000 and U.S. $13,000 million(4).

The objective of this operation was the refinancing of the short-term financial debt, with the objective of alleviating the cash flow problems that PDVSA was going through at that time, and a maximum of U.S. $ 5,228 million(5) could be saved as a result of the future payments.

Legal challenges

The bond exchange was not without controversy. Its approval violated Article 150 of the Venezuelan Constitution, which requires that contracts of national public interest must be approved by the National Assembly. In addition, offering 50.1% of the shares of the subsidiary CITGO as collateral, though necessary for the exchange to be attractive, could be detrimental to the Republic if the obligation is unfulfilled, which would leave the country without a refining capacity of some 750,000 barrels per day(6).

Current Situation

In recent years, CITGO has been the subject of numerous international lawsuits and litigation from numerous foreign companies. The Canadian mining company Crystallex filed a lawsuit against Venezuela for U.S. $1,386 million as payment for obligations owed by the former president of Venezuela, Hugo Chávez Frías(7). Earlier this year, the U.S. multinational ConocoPhillips won a lawsuit before the International Chamber of Commerce (ICSID) forcing the state oil company PDVSA to pay compensation of more than U.S. $8,000 million for the oil assets expropriated in 2007(8). The decision has been appealed at the direction of Juan Guaidó as acting president of Venezuela, with the objective of preserving the physical and financial assets of Venezuela abroad(9).

At the end of April 2019, the Permanent Commission of Finance and Economic Development of the Venezuelan National Assembly agreed to carry out the payment of the PDVSA 2020 voucher for an amount of U.S. $71.5 million in interest in order to protect the assets of Venezuela abroad. The decision has fueled financial markets’ expectations of possible political change in Venezuela in the medium term. This payment will be made during the grace period once the Office of Control of Foreign Assets (OFAC) grants the license required for the payment to be carried out(10), which could take up to thirty days. According to Alejandro Grisanti(11), member of the ad hoc board of PDVSA appointed by Juan Guaidó, the resources will come from a custodial account of PDVSA that is under the control of acting president Juan Guaidó, instead of using CITGO’s money(12).

The payment is part of a broader strategy to maintain investors’ interest in investing in the Venezuelan oil sector, as part of the “Plan Pais” strategy of supporting economic growth by leveraging the oil sector. The Guaido government is proposing changes in the legal and regulatory framework that would allow private companies to operate oil fields individually and in partnership with PDVSA(13).

1: Source: Rendivalores.com

2: This amount includes interest and principal payments for this year. Source: Rendivalores.com.

3: Source: Kapital Consultores, Bloomberg.

4: Source: https://www.larepublica.co/globoeconomia/citgo-consigue-credito-de-us1200-millones-para-financiar-operaciones-y-gestionar-deuda-2845166

5: Source: Kapital Consultores, Bloomberg.

6: See: The CITGO Story (https://www.citgo.com/WebOther/ECards/citgostory44.pdf).

7: In 2002, Crystallex had been awarded exclusive rights to develop the Las Cristinas gold mine in the border state of Bolívar, in southern Venezuela. In November 2008, the Venezuelan government seized the mine. (Source: https://prodavinci.com/que-esta-pasando-con-citgo/).

8: See: [https://elpais.com/internacional/2018/05/11/america/1526069049_337653.html

](https://elpais.com/internacional/2018/05/11/america/1526069049_337653.html)

9: See: https://lta.reuters.com/articulo/venezuela-petroleo-idLTAKCN1RS2BX

10: See: https://www.laprensalara.com.ve/2019/04/asamblea-nacional-autoriza-pago-de-bono-pdvsa-2020/).

11: See: https://www.bloomberg.com/latam/blog/guaido-busca-dar-un-salvavidas-al-unico-bono-al-dia-de-venezuela/

12: On March 28, CITGO successfully obtained a loan for U.S. $ 1,200 million over five years, with the objective of covering its operating expenses and refinancing its debt (See: https://www.larepublica.co/globoeconomia/citgo-consigue-credito-de-us1200-millones-para-financiar-operaciones-y-gestionar-deuda-2845166)

13: See: https://www.reuters.com/article/venezuela-politics-energy-law/venezuelas-guaido-moves-to-re-open-energy-industry-document-idUSL1N20Z07Y