The Sideshow about Venezuela's Prescription Clause

Mark Weidemaier and Mitu Gulati

We’ve written before about the perplexing prescription clause that appears (in one form or another) in Venezuela’s bonds. A common version of the clause says something like this:

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.

The clause is weird. Because Venezuela’s default in the payment of interest is now approaching its 3-year anniversary for some bonds, some investors worry that, unless they file suit, claims to recover those missed payments will become void. Seeking to reassure them, the interim government has released a statement saying not to worry. In the interim government’s view, the clause “addresses situations where the Fiscal Agent holds amounts paid by the Republic that are unclaimed by, or otherwise not distributed to, bondholders.” The statement asserts that the prescription period has not started to run because the fiscal agent hasn’t yet received the funds.

The government also points out that none of this “affects the six-year statute of limitations” in New York. For its part, the Maduro regime claims the clause does shorten the statute of limitations but has offered, out of the kindness of its heart, to toll the clause.

As we noted in our last post, one way to understand the prescription period is that it protects the fiscal agent but does not alter bondholder rights. (The idea here is that the fiscal agent should not have to sit around forever waiting for tardy bondholders to collect their money.) But that seems quite clearly not to be the purpose of this clause. That’s because the bonds also include the following clause, which protects the fiscal agent by letting it off the hook when it returns the money to the government 2 years after receiving it:

Any money that the Republic pays to the Fiscal Agent for payment on any Bond that remains unclaimed for two years will be returned to the Republic. Afterwards, the holder of such Bond may look only to the Republic for payment.

So if the fiscal agent is protected after two years, what work does the prescription clause do? The Maduro administration suggests that it supplants New York’s 6-year statute of limitations. So understood, it is not clear the clause would be enforceable, at least in the context of missed principal payments. That’s because New York law may not enforce a clause extending the statute of limitations. But the shorter, 3-year period might truncate the statute of limitations, and that is what has investors concerned. The interim government’s statement should ease that concern, even if the prescription clause means what the Maduro administration claims.

But the clause doesn’t really seem designed to extend the statute of limitations. Among other reasons, the clause defines when claims for payment become “void.” That’s not the effect of the statute of limitations, which simply provides a defense to any lawsuit. The statute doesn’t negate the claim. For example, the law will often enforce a new promise to pay a debt even if claims under the original debt are now time-barred. So perhaps a better way to understand the clause is that it sets an outer boundary on claims, so that they cannot be pursued at all, even if the law would otherwise allow it, unless “presentation for payment is made” (whatever that means) within the prescription period. Although we aren’t positive, we are guessing this is how the interim government understands the clause.

A final puzzle is that Venezuela’s bonds seem to include different prescription periods. So far as we can tell, the dividing line is that most outstanding bonds were issued pursuant to fiscal agency agreement dating from 2001. Prior bonds were issued under earlier fiscal agency agreements with somewhat different provisions.

Comments

[Jorge Piedrahita]

As Mark and others state if we use the glasses of New York Law and legal logic it is perplexing to comprehend the prescription clause present in bonds issued by Venezuela.

There is however a simple explanation regarding the genesis of this language into the prospectus of most bonds issued by Venezuela this century -- the only exception was the $1 billion issuance of the 9.375% 2034 bond in January 2004 with JPMorgan as underwriter and bookrunner which naturally gravitated the bonds to JPMorgan Chase Bank, N. A. as Fiscal Agent using the 1998 FAA which excludes this issue (as opposed to the Deutsche Bank Fiscal Agency Agreement of 2001 -- amended in 2003, 2005 and 2007).

The origin of the prescription clause can be traced to the “Organic Law of the Financial Administration of the Public Sector” (*) approved on September 5, 2000 which was part of a process of reorganization of the public sector established by decree of the National Constitutional Assembly of 1999. The law in its article 99 states (free translation):

"The obligations from the public debt issued or the securities that represent it prescribe at 10 years; the interest or the coupons representative of these prescribe after three years. Both periods will run from the respective due date of the obligations.”
(*) For the law in Spanish please see: https://www.oas.org/juridico/spanish/ven_res35.pdf

As an amateur student of legal matters related to bonded debt, I would like to hear from Mark and any others that feel excited to join the discussion.

A few issues between many in my mind:
a) Does local law matter at all?
b) Might there be any basis for Venezuela to attempt lowering nominal claims under this clause which is codified in an important “organic” local law that investors know or should have known at the time of issuance? The Spanish text does not have inconsistencies but its sloppy literal translation with the add on of “whichever is the later of… …such payment first becomes due… and, the date on which, the full amount having been so received…”
c) Does it change anything the fact that Maduro’s de-facto administration of Venezuela (not legally recognised in the US) has raised the issue and seems to acknowledge the application of a prescription? After all, bondholders cannot at this point claim ignorance about this controversial issue.

[PEPP]

OK. Good debate. However, let us get to the action: what advice would you give to private individuals or small investors. Should they sign the proposed NEW AGREEMENT TO INTERRUPT THE PRESCRIPTION PERIODS IN PDVSA BONDS or they ignore it? And why? Big guys Goldman Sachs style have an army of lawyers to deal with the issue. Thousands of small, mainly European investors do not. Thank you for your take here.