Venezuela’s Weird (and Possibly Mythical?) Prescription Clause

Mark Weidemaier & Mitu Gulati

Ben Bartenstein at Bloomberg has a provocative article on “prescription” clauses in Venezuela’s post-2005 sovereign bonds. As he explains, these clauses arguably modify the statute of limitations that would otherwise apply to bondholder claims, creating a “loophole” that might cost investors billions. Beginning in 2005, the Republic’s bond prospectuses began to include language like this (from a bond maturing in 2026):

Claims in respect of principal and interest will become void unless presentation for payment is made within a period of ten years in the case of principal and three years in the case of interest from the Relevant Date, to the extent permitted by applicable law…

As Bartenstein notes, the meaning of the clause isn’t entirely clear. But he suggests that it might be interpreted to “let Venezuela off the hook on unpaid interest to any creditor after three years—provided the creditor doesn’t take legal action seeking repayment during that span.”

This is a great find by Bartenstein, and he’s right to highlight the risks associated with the clause. But we doubt the clauses have this effect. Actually, we’re not sure the clauses even exist. But first, some background. (Full disclosure: One of us (Mitu) talked to Ben about his find and was rather unhelpful to him; not even having been aware of these clauses prior to Ben flagging them.)

Neither of us had previously noticed this language in Venezuela’s bond prospectuses. Nor, apparently, had the investors Bartenstein contacted for the story. We had a vague sense that prescription clauses appeared in bonds in the late 1800s and early 1900s. But these clauses protected the Fiscal Agent or Trustee. Basically, if a creditor didn’t show up to collect her coupon payment in New York or London or Paris, the bankers wouldn’t have to sit around waiting for the investor to show up. After the prescription period, the investor would have to go to Caracas or Buenos Aires—to the issuer itself—to ask for payment. The clause wasn’t supposed to truncate investor rights.

In the modern era, friends who are real lawyers have explained that prescription clauses routinely appear in English-law bonds, and bonds issued under the law of other European countries, because specifying a prescription period is a requirement to list the bonds on an exchange. That’s not so in New York.

But that apparently doesn’t keep governments from including prescription clauses in NY-law bonds.  From our quick examination of a few dozen sovereign bonds, sometimes the provision is titled “Prescription”, on other occasions there is a provision that says “Limitation on Time for Claims”, and in still other cases there is no such clause at all.  As Bartenstein points out, these clauses can be land mines for the creditor who assumes that she has no obligation to act before the statute of limitations expires (in six years). To illustrate, here’s the prescription clause in a recent Russian Federation bond (2017):

Claims against the Russian Federation in respect of principal and interest shall become void unless made within a period of three years from the date following the Maturity Date or a relevant Interest Payment Date, as applicable.

Void after only three years? Of course, there’s still room to argue about the meaning of a clause like this (e.g., does simply demanding payment mean the investor has “made” a claim, or must the investor file a lawsuit?). But if interpreted to require the filing of a lawsuit within three years, it would substantially shorten the statute of limitations.

To illustrate how treacherous the quicksand can be, take this language from a recent Argentine bond (2017):

Claims against the Republic for the payment of principal, interest, if any, or other amounts due on the Bonds will be prescribed unless made within five years, with respect to principal, and two years, with respect to interest, premium, if any, or other amounts due on the Bonds, in each case from the date on which such payment first became due, or a shorter period if provided by Argentine law.

Is “prescribed” different from “void”? Does the underlined language allow Argentina to unilaterally shorten the prescription period even further, so that investors have even less time to make a claim? Why would investors in NY-law bonds—which are supposed to offer protection against such unilateral acts—agree to such craziness? We think a lot about sovereign bonds as contracts, but we have never given clauses like these much thought. Clearly, we should be paying more attention.

Back to Venezuela’s post-2005 bonds. Again, here’s the text of the prescription clause. This time, however, we have included the definitional section, which makes things even weirder:

Claims in respect of principal and interest will become void unless presentation for payment is made within a period of ten years in the case of principal and three years in the case of interest from the Relevant Date, to the extent permitted by applicable law. “Relevant Date” means whichever is the later of (i) the date on which any such payment first becomes due and (ii) if the full amount payable has not been received by the Fiscal Agent on or prior to such due date, the date on which, the full amount having been so received, notice to that effect shall have been given to the Bondholders.

Does this clause shorten the statute of limitations? To answer “yes,” of course, one needs to understand the clause to require investors to file lawsuits in order to make “presentation for payment.” For now, let’s make that assumption. We still don’t have a clue what the clause means. The prescription period runs from the Relevant Date. That is the later of the due date for the payment (hence the argument that the clause shortens the statute of limitations from 6 to 3 years for missed coupons) or the date a late payment is actually made and bondholders are notified of that fact. Um… what? So… the prescription period extends for three years after the payment is actually made? That would seem to extend the statute of limitations in a case where Venezuela actually made the payment [cue jokes about waiting until 3 years after hell freezes over].

If interpreted this way, it’s not clear the clause would be enforceable under NY law (here’s Glenn West of Weil Gotshal explaining why NY law may not allow parties to extend the statute of limitations). And, in fact, we don’t really think the clause should be interpreted this way. We only highlight the oddity of the definition of Relevant Date. Put simply, if the intent is to shorten the statute of limitations, this is a bizarre way to express that intent. The clause makes more sense if understood as protection for the fiscal agent or trustee.  

We are confused on an even deeper, sort of existential level. Does the prescription clause even exist at all? We’re not so sure that it does. As Bartenstein points out, the clauses began to appear in prospectuses for bonds issued in 2005. But the prospectus is a sales document, typically not a source of contract rights, which derive from the fiscal agency agreement and associated contracts. Venezuelan sovereign bonds issued post-2005 are governed by a 2001 fiscal agency agreement (FAA), which also happens to govern the Republic’s pre-2005 bonds. And when we look at the 2001 FAA, we don’t see any prescription clause. Nor do we see the clause in any of the subsequent amendments (in 2003, 2005, and 2007) to the FAA.

Now, maybe we are not looking closely enough or in the right place. But if we are right, does the fact that the prescription clause is not in the FAA mean that it does not limit investors’ rights (assuming it is interpreted to limit them in the first place)? It seems to us that there is a good argument that the clause does not, in fact, operate as a limit.

Even if we are wrong—that is, even if the clause actually exists and does shorten the relevant statute of limitations—perhaps this is all a tempest in a teacup. As one of our students asked in the context of a discussion of the Bloomberg article: “Would a big financial institution with expensive lawyers really miss the statute of limitations?” That said, Lucesco v. Republic of Argentina.

Comments

[Roland]

Baffling.

Couldn't it be rather than somebody [for whatever reason--or, even, no reason at all] pushed for including current Article 91 of the local Public Financing Act as actual language in sovereign bonds? Such provision has been a staple in the often-reformed public financing legislation, dating back several decades (you'd find it in 1959's version of the Public Financing Act--and all amendments thereof ever since). But the very least I'd say is that both provisions (i.e. the language on the prospectuses and the local legal norm) read pretty much as identical.

[Jorge Piedrahita]

In all honesty the finding is not such as most people I know are and have been fully aware of the clause for a very long time.

I am in agreement with your thinking that there is no clarity on what the clause actually means. Do investors need to just send a letter demanding payment or do they need to file a lawsuit? Is it enforceable by the Republic? (I am sure they will litigate to that effect). Remember Argentina's position regarding the Statute of Limitation which ended up costing amateur players in the holdout game.

In the case of Venezuela and PDVSA, investors are in need of costly help which typically cannot be done unless you are a very large institutional investor that can afford the elevated costs involved.

This clause as many other legal issues from the toolkit will put Venezuela and PDVSA restructuring on a new league regarding litigation, intercreditor issues, etc.
It will be the most interesting restructuring of modern times.

[CA]

https://venezuelacreditors.com/ All the relevant information and key facts you need to make the best decision on Venezuela debt

[RDO]

In WHITE HAWTHORNE v ARGENTINA. Judge Griesa not only demounted the PariPassul introducing new elements such as the “course of conduct” and being “a unique recalcitrant debtor” but also applied the prescription of 6 years and according to NY law to this claims, barring the entire proceeds and leaving these holdouts with nothing. In this case the statute of limitations was not interpreted as “protection” to the fiscal agent but as a tool to effectively cease any further claim.
What is certain, is that this clause will add to the list of future disputes and controversies surrounding the Venezuela restructuring process. An investor should be preparing the ground and taking actions to shield their rights on any possible outcomes, especially when, at this point, is not even clear with whom they will be negotiating.

[Rental Mobil Jakarta]

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