Venezuela’s Oil-Backed Bonds Plunge After U.S. Court Ruling

U.S. Court Ruling Sends Venezuela’s Oil-Backed Bonds into Collapse

Following a recent ruling by a New York court that Venezuelan law would be the determining factor for the validity of bonds issued by the state-operated PDVSA oil company, Bloomberg has reported a significant decline in bond values, with concerns arising over their legitimacy.

The bonds in question amount to $2 billion, and PDVSA notes experienced a notable drop of 17 cents subsequent to Tuesday’s ruling, as per Bloomberg’s findings.

The ruling, issued by the New York State Court of Appeals on Tuesday, came after the Venezuelan opposition, which currently oversees the U.S. assets of the state-run oil giant, argued that bonds set to mature in 2020 lacked validity since they hadn’t obtained approval from Venezuela’s National Assembly. The court’s decision established that the determination of validity should be based on local law at the place of issuance.

Venezuela's Oil-Backed Bonds Plunge After U.S. Court Ruling
Venezuela’s Oil-Backed Bonds Plunge After U.S. Court Ruling (Credits: Bloomberg)

The opposition in Venezuela aims to nullify these bonds primarily because they are secured by a 50.1% stake in Citgo Holding, the umbrella entity providing PDVSA with ownership of Citgo. Voiding the bonds would consequently safeguard Citgo from being seized by creditors, as reported by Reuters.

In mid-October, PDVSA bonds experienced a surge in value following the Biden administration’s decision to permit U.S. investors to purchase the bonds in alignment with a sanctions relief package for Venezuela. The lifting of these restrictions resulted in an immediate 10-cent increase in Venezuelan government bonds and a doubling of PDVSA bond prices, according to Bloomberg.

These bonds hold significant allure for U.S. investors due to their affordability and the anticipation that relations between the U.S. and Venezuela will eventually normalize. Guillermo Guerrero, senior strategist at London-based EMFI, noted in a report carried by Bloomberg in October that the lifting of the trading ban is expected to unleash substantial demand from U.S. entities. The general optimism surrounding these developments suggests a considerable uptick in bond prices.

I'm Richard Rosales, I cover political news and ongoing US elections.