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How Easily Can Creditors Reach Venezuelan Oil Receivables?

posted by Mark Weidemaier

Among emerging market countries that have needed to restructure in recent decades, Venezuela is uniquely dependent on external commercial ties, especially oil exports to the United States by state oil company PDVSA. Because of this, many wonder whether holdout creditors pose a unique threat to the country's restructuring prospects. Unlike, say, Argentina, which could keep most valuable assets away from creditors, Venezuela must worry that holdouts will seize oil receivables. PDVSA's assets include money due from U.S. customers. These intangible assets are located in the United States, where courts can easily divert them to satisfy judgments obtained by holdouts. Note that this logic assumes that courts treat PDVSA as Venezuela's alter ego--a topic discussed several times on this blog--but the assumption is plausible.

But even if we assume that courts will ignore the boundaries between PDVSA and the government, is the risk of asset seizure really so great? The scenario described above presumes that Venezuela structures oil sales to U.S. entities in implausibly straightforward ways. Suppose, for instance, that PDVSA sells oil directly to U.S. buyers in exchange for a promise to pay on delivery. In that case, sure; creditors of both PDVSA and the government will have a field day. But while I am no expert on how PDVSA structures its operations, I would be stunned if things were so simple.

For one thing, to the extent U.S. parties owe money, these debts are likely owed not to PDVSA but to direct or remote subsidiaries. (This fact presumably explains why PDVSA's bondholders wanted a separate guarantee from the company's main Venezuelan subsidiary.) So the receivables would be protected unless the entity that "owned" them was deemed PDVSA's alter ego. More importantly, PDVSA can readily export oil to the U.S. without actually selling oil--either itself or through subsidiaries--to U.S. parties. I'm also no expert in oil and gas transactions, but it should be possible to structure operations so that title to oil passes outside the U.S., ideally to an independent entity that is not itself located in the U.S. In principle, this should protect both the money due from U.S. buyers (which would not belong to PDVSA) and the consideration due from the initial purchaser (which can be transferred outside the U.S. by an entity with few or no ties to the country). True, neither PDVSA nor the government can completely eliminate the threat to oil exports. But the fact that a country depends on oil exports doesn't mean that creditors can easily find attachable assets. Nor does it mean that default will effectively shut the country out of important oil markets.

Comments

"PDVSA's bondholders wanted a separate guarantee from the company's main Venezuelan subsidiary" because the issuer is a holding company whose capacity to pay depends on dividends from the main operating company. It is customary to ask for such guarantee when the issuer is a holdco.

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