US Court Ruling Sends Venezuela’s Oil-Backed Bonds into Collapse

By Charles Kennedy of OilPrice.com

A day after a New York court ruling that Venezuelan law would determine the validity of bonds issued by state-run PDVSA oil company, Bloomberg reports that bonds have “collapsed”, slumping on questions over their validity. At stake is $2 billion in PDVSA bonds, and PDVSA notes dropped 17 cents following Tuesday’s ruling, according to Bloomberg. 

On Tuesday, the New York State Court of Appeals ruled on the matter after Venezuelan opposition, which controls the state-run oil company’s U.S. assets, said the bonds set to mature in 2020 were invalid because they had not been approved by Venezuela’s National Assembly. The New York Court of Appeals ruled that validity must be determined by local law in the place of issuance. 

Venezuela’s opposition is seeking to have the bonds invalidated because they are backed by a 50.1% stake in Citgo Holding, the holding group that gives state-run PDVSA ownership of Citgo. In turn, bond invalidation would prevent creditors from seizing Citgo, Reuters reports.

In mid-October, PDVSA bonds soared after the Biden administration moved to allow U.S. investors to buy the bonds in line with a sanctions relief package for Venezuela. The removal of those restrictions led to a 10-cent jump in Venezuelan government bonds immediately, along with a doubling of the price of PDVSA bonds. Bloomberg reported. 

The bonds are highly attractive to U.S. investors because of their price and hedging that relations between the U.S. and Venezuela will eventually normalize. 

“The lifting of the trading ban is likely to unleash significant pent-up demand from US persons,” London-based EMFI’s senior strategist, Guillermo Guerrero, wrote in a note carried by Bloomberg in October.  “This, alongside the general optimism that these developments will inevitably bring, guarantees a significant rise in bond prices.”