Third Circuit Affirms Crystallex Attachment Order

Today, the U.S. Court of Appeals for the Third Circuit affirmed the order allowing jilted Canadian mining company Crystallex to attach PDVSA's equity stake in PDV-Holding (the corporate parent of CITGO). Here's the unanimous opinion. (For prior coverage of the attachment ruling see here.) It's possible proceedings in the District Court might be delayed further if Venezuela seeks Supreme Court review, while the district judge resolves outstanding procedural questions (see here), or because of lingering uncertainty about whether the U.S. sanctions now in place will prevent an actual execution sale. So it's not exactly over. But on the core question--whether Venezuela's control over PDVSA was so extensive as to make the entity the government's alter ego--the Court of Appeals resoundingly rejected Venezuela's argument: "Indeed, if the relationship between Venezuela and PDVSA cannot satisfy the Supreme Court’s extensive-control requirement, we know nothing that can."

India to Issue its First Foreign Currency Sovereign Bond?

Mitu Gulati & Mark Weidemaier

The two of us are beginning a project to build a dataset of foreign currency sovereign bonds and their contract terms. The dataset of bond issuances has a conspicuous absence: India.

Turns out India has never issued a foreign currency sovereign bond. Some state-owned enterprises have ventured onto the foreign markets in search of investors, but not the sovereign. This is a bit puzzling because India certainly has the economic growth and financial prospects to attract foreign investors. Countries like the Philippines, Turkey, Argentina, Mexico, Brazil, Russia, and China regularly tap the international markets. Indeed, closer to home, many of India’s smaller neighbors, such as Sri Lanka, Pakistan and even little Maldives, have tapped the foreign currency sovereign markets. We also know from our research that there is considerable appetite for Indian sovereign issuances from big investors in places like Singapore and Canada. The interest is such that foreign funds buy Indian domestic currency issuances despite the inflation risks they pose. Presumably, these funds would jump at the opportunity to buy a foreign currency issuance.

So, why not India?  Or, perhaps we should ask: Why now India? There are conflicting reports, but the government appears to be considering issuing an international, foreign-currency bond, likely yen- or euro-denominated. In a recent budget speech, the Finance Minister of India announced the plan (see here, for a recent Bloomberg story). Other reports, however, indicate that the office of Prime Minister Narendra Modi has developed cold feet about the plan (see Bloomberg here). The Economic Times of India (here; and also this Money Control article) also describes how the senior bureaucrat who was in charge of the issuance has been transferred from the Finance Ministry to a less prominent position and is seeking to retire early.

Pre-Revolutionary Chinese Debt: An Investment for the Truly Stable Genius

Mark Weidemaier & Mitu Gulati

About a year ago, an unusual securities action was brought against a pastor at one of the largest Protestant churches in the country and a financial planner. The accusation was that the two, Kirbyjon Caldwell and Gregory Smith, had duped elderly investors into buying participation rights in bonds issued by the pre-revolutionary Chinese government. The bonds have been in default since 1939. Here is the SEC’s press release; Matt Levine at Bloomberg talked about the case here. Among other things, the SEC accused Caldwell and Smith of violating the registration requirements of the federal securities laws and of committing fraud.

This case got a fair amount of attention because Mr. Caldwell is no ordinary pastor. He leads one of the largest congregations in the country, with roughly 14,000 members, and was a spiritual adviser to George W. Bush and Barack Obama (see here).

The core of the fraud case seems to be that Caldwell and Smith promised investors safe, quick returns. Allegedly, the plan was to sell the bonds for a profit or to get the Chinese government to pay up. From the SEC’s perspective, this was like promising to squeeze water from a stone; since the communist takeover in 1949, Chinese governments have steadfastly refused to pay the bonds.

It all sounds rather daffy. Also, weirdly specific. It can’t be easy to persuade people to open their pocketbooks for antique Chinese sovereign bonds. Still, we were struck by the SEC’s characterization of the bonds, in both the press release and the complaint, as “defunct” and as “collectible memorabilia with no meaningful investment value” (here and here). The characterization presumes the answer to a question that has long fascinated us, which is whether a sufficiently motivated claimant could enforce these bonds against China.

Venezuelan Debt: Soft Power Matters

Mark Weidemaier and Mitu Gulati

Last week, we did a post about a set of creative but long shot defenses that Venezuela’s Interim Government has invoked to defend against lawsuits by creditors holding defaulted debt. Basically, the government wants a stay of creditor enforcement efforts. The plaintiffs want summary judgment—i.e., a relatively quick entry of judgment, without a trial or significant fact-finding. The Interim Government’s defenses have equitable appeal but questionable (although not zero) legal merit. The defenses included the contract law defense of Impossibility and the customary international law defenses of Necessity and Comity. Impossibility rarely works, especially when the defendant’s argument boils down to, “I’m out of money and need time to work out a deal with my creditors.” Necessity and Comity may not even apply in cases arising from a sovereign’s default. However, the Interim Government’s legal team persuasively emphasized their client’s impossible situation—recognized as the legitimate representative of the country but unable to access its resources.

Judges have power, and much of this power is of the “soft” variety that comes, not from the ability to resolve substantive disputes, but from professional status and authority and from the ability to control process. Here, the judge has given the Interim Government a bit of the relief it wanted, in the form of a relatively favorable scheduling order.

Equal Treatment in Sovereign Restructurings

Mitu Gulati & Mark Weidemaier

Last Friday, the Venezuelan government (at least, the representatives of that government recognized by the U.S.) issued a set of broad principles it intended to follow when it conducted the debt restructuring that is going to be necessary as soon as Mr. Maduro is given the proverbial boot from office.  One of those principles is going to be “equal treatment” of the various claims denominated in foreign currency – PDVSA bonds, promissory notes, Venezuelan sovereign bonds, arbitral awards and so on.  For those who are familiar with sovereign restructurings, the use of this broad equal treatment principle is going to be familiar (for example, Greece used it in 2012 when faced with an array of different types of debt instruments).

Our question is why.  The different debt instruments that Venezuela has – PDVSA bonds, sovereign bonds, Prom Notes, etc. – have different legal terms.  Some have stronger creditor rights and others have weaker ones. And that probably means that the current investors paid different amounts to buy them.  If investors paid different amounts for stronger versus weaker legal rights, doesn’t it stand to reason that the ones with the stronger rights should be offered a higher payout in a restructuring? And if they are not paid different amounts, isn’t that an invitation to the ones with stronger rights to engage in holdout behavior?

In Greece, for example, both the local-law governed Greek sovereign bonds and the foreign-law ones were offered the same deal.  Almost of the local-law bondholders took the deal, but relatively few of the foreign ones did. End result: Greece paid out the foreign-law bonds that refused the offer in full.  The same was true for a bunch of the Greek guaranteed debt. 

In Barbados, in the restructuring that is ongoing, the domestic-law bonds have taken the offer made by the government. But that same offer has been turned down the foreign-law bondholders; presumably because they think their instruments are worth more because of their stronger legal rights.  Wouldn’t it be efficient to offer the foreign holders more rather than getting mired in years of litigation?

There is undoubtedly a logic to the equal treatment principle.  We are wondering what it is. Efficiency? Maybe the logic is that if, for example, Venezuela were to offer the sovereign bonds requiring 100% of the creditors to approve of the restructuring a few cents more on the dollar than the ones requiring 75%, the whole process would get mired in disputes over whose bonds had stronger or weaker legal rights? Or maybe the logic is that investors will either hold out or not. Put differently, maybe there really is no marginal investor (i.e., one who, in exchange for a few extra pennies, might choose not to hold out and sue). Investors either have an appetite for litigation (in which case they aren’t interested in accepting restructuring terms) or they don’t (in which case there is no need to compensate them for rights they don’t have the appetite to assert). But again, we are speculating.

As a final puzzle, why are some bonds exempt from the equal treatment principle? The restructuring guidelines say that bonds backed by collateral will receive different treatment. But why? Why is a right to collateral different from a 100% voting right? Perhaps it is because some collateral pledges are relatively easy to enforce, such as the pledge of shares in U.S. entities. The PDVSA 2020 bonds are the primary example here. By contrast, a 100% voting right ensures the right to sue but doesn’t do much to help an investor enforce the judgment. However, the guidelines released by the Guaido team may have in mind something more than just the 2020s.

Evaluating Venezuela’s Guidelines for Debt Restructuring

Mark Weidemaier & Mitu Gulati

As reported in the Financial Times, Reuters, and elsewhere, Juan Guaido’s economic and legal team has released a report setting out guidelines for a restructuring of Venezuelan debt. The report, attached here, describes a process that can only happen if/when Maduro loses power and the U.S. government lifts the current sanctions regime, which effectively forbids most transactions in Venezuelan debt. The report is a brief three pages, but it offers intriguing clues about what a restructuring might look like.

Proposals to restructure the Venezuelan debt must accommodate certain basic realities:

- The country is experiencing a dire humanitarian crisis, which demands immediate attention.

- The debt stock is utterly, needlessly complex. Venezuela has somewhere in the range of $200 billion in external liabilities. Virtually all creditors are unsecured, and every creditor’s repayment prospects are tied directly to the government’s ability to monetize one asset: oil. For all practical purposes, every creditor is in the same position. Yet the debt is spread across multiple obligors (the government, PDVSA, etc.) and a bewildering array of obligations (bonds, promissory notes, trade credits, arbitration awards, and who knows what else).

- The government therefore needs time—time to focus on humanitarian needs, time to rehabilitate the oil sector, time to stabilize the political situation, time to determine the full scope of its debts, time for a new government to come up with a credible economic plan for recovery, time to persuade key foreign companies that they won’t be expropriated again if they come back and help in the recovery, and time to come to terms with its creditors. But…

- It may not have much time. Many creditors have been patient. But a few have already reduced claims to judgment and initiated attachment proceedings against crucial government assets, including U.S. oil operations. It is surprising that the litigation floodgates have not opened, but that could happen any day now.

- The next government is going to be highly vulnerable to creditor lawsuits, and particularly so in the United States. It cannot right its economy without selling oil abroad (and sales in the U.S. are typically the cheapest, given refineries and distances). But these sales generate assets in foreign jurisdictions, where creditors will try to seize them. This vulnerability, paired with the complexity of its debt stock, makes Venezuela more akin to Iraq than to more recent crises.

- Finally, the U.S. government may prove a fickle ally. The most effective way to buy time for a Venezuelan restructuring would be for the U.S. and other key jurisdictions to block creditors from attaching Venezuelan assets while the government was engaged in good faith restructuring negotiations. This is what happened for Iraq, but will the Trump administration be able to collaborate with other key nations (China, Russia) to produce a solution similar to that designed for Iraq?  We don’t know.

These facts make for a very messy debt restructuring scenario. But that doesn’t mean the restructuring plan must be complicated. To the contrary, the proposal released by Mr. Guaido’s team attempts to simplify. (Note that the plan does not address debts owed to other nations, presumably including state-owned companies):

Timing and credibility: As noted, Venezuela needs time to address pressing humanitarian needs and, more broadly, to get its house in order. It also needs to persuade its creditors that it has accurately estimated its liabilities and repayment capacity. But the byzantine debt stock created by the Maduro regime, combined with the government’s long-standing refusal to engage with the IMF, means that creditors have little reason to accept the government’s estimates. Not surprisingly, then, the proposal envisions that the IMF will both provide emergency humanitarian assistance and play its usual role in assessing the country’s growth and repayment prospects.

Venezuelan Debt Restructuring: Making Impossibility Possible?

Mark Weidemaier & Mitu Gulati

There have been relatively few recent developments regarding Venezuela’s debt, as Maduro hangs on to power and U.S. government sanctions bar trading or restructuring of Venezuelan debt by U.S. persons. However, at least one important development has mostly escaped attention. Venezuela-watchers know that the U.S. government, along with many others, has recognized Juan Guaido’s team as the legitimate government of Venezuela. This had immediate implications for creditor lawsuits against Venezuela in U.S. courts. The first involved disputes over which legal team—the lawyers selected by Maduro or those selected by Guaido—had the dubious honor of representing the Venezuelan government. The answer (sensibly enough) seems to be that Guaido’s legal team calls the shots. But Mr. Guaido and his team represent a government in exile, without meaningful resources or real levers of power. Plus, no one denies that Venezuela has failed to pay its creditors. Normally, those facts lead courts to enter judgments in creditors’ favor and to let creditors attach government assets. What legal basis could a Guaido-led government have for resisting these lawsuits?

Court papers defending against the two latest creditor lawsuits reveal an intriguing and innovative strategy. The two cases are Pharo Gaia Fund Ltd et al. v. Venezuela & Casa Express Corp. v. Venezuela.  Both are pending before Judge Analisa Torres in federal court in the Southern District of New York. In filings made a couple of weeks ago (June 21, 2019), the lawyers for Venezuela (Arnold & Porter) raised three doctrines that one rarely sees in modern sovereign debt litigation for the simple reason that these ordinarily have little chance of success: impossibility, necessity and comity.

How Chaotic Would an Italian Debt Restructuring Be? (Not Very)

Mark Weidemaier & Mitu Gulati

Wolfgang Munchau’s column in the FT yesterday identifies a possible Italian debt crisis as one of the biggest worries for the Eurozone. This makes sense, given Italy’s huge debt stock (upwards of 130% of GDP), seemingly irresponsible politicians, and low growth. An Italian debt restructuring would be the biggest in history, yet it might prove necessary. Munchau highlights the economic consequences of a debt restructuring (e.g., for Italian and other European banks) and also asserts that Europe’s “legal systems are not prepared.” The general sense is that an Italian debt crisis will be a disaster.

It won’t be good, that is for sure. But if planned properly, an Italian debt restructuring can be done relatively smoothly. Why? Because Italy has an enormous “local law advantage,” combined with an enormous set of captive (aka local) holders who have been, to quote an old friend in the sovereign restructuring business, “rolling over their Italian bonds since Hadrian died.”

One might ask, Didn’t Greece have the same local law advantage and wasn’t that a chaotic restructuring? Our reply is that the source of chaos in the Greek case was the unwillingness of key institutions to acknowledge that the debt was unsustainable until very late in the process. The restructuring itself was relatively smooth (for more, see here). In any case, the restructurers this time can learn from the Greek experience. Plus, the local law advantage is significantly bigger in Italy.

Students in our joint class on sovereign debt worked intensely this semester on what an Italian debt restructuring might look like, and they have recently posted their work to ssrn.com. From our informal conversations with European colleagues and friends, we understand that lawyers at various official sector institutions take the position that they do not have the power to do the things our students suggest. But we have yet to hear convincing reasons for this position. Indeed, our impression is that these lawyers are mostly worried that they will spook investors if they publicly acknowledge having the power to restructure (on the theory that investors might take this as a sign that restructuring is likely).

A New Development on the CAC v. No-CAC Question in Euro Area Sovereign Bonds

Mitu Gulati and Mark Weidemaier

We have previously discussed how Euro area sovereign bonds with Collective Action Clauses or CACs (issued after Jan 1, 2013) and without CACs (issued prior to Jan 1, 2013) potentially differ in their vulnerability to debt restructuring. For anyone trying to draw up plans to tackle a future Euro area sovereign debt crisis (e.g., in Italy), it will be crucial to decide whether the CAC and no-CAC bonds are in fact different from a restructuring perspective. Conversely, for investors trying to predict which bonds to avoid and which to buy, the matter is equally important – and indeed, should be reflected in prices (for recent empirical papers, see here, here and here).

Last week, a research note by two Dutch researchers made its way to our desks (via reporters who found the claims intriguing). These researchers, looking into investment treaties entered into by the EU with Singapore, Canada and Vietnam, were concerned about two aspects relevant to future sovereign debt restructurings (among other things). To quote their abstract:

On the eve of the vote in the European parliament on the new investment treaty between Singapore and the European Union, SOMO publishes an analysis on the risks for managing government bonds and money flows. The analysis explains how the EU-Singapore Investment Protection Agreement (IPA) negatively impacts the policy space the EU, EU member states and Singapore have to manage financial instability and prevent financial crises.

(Note:  As per the Dutch research note, the EU-Singapore Investment Agreement has not been ratified by the EU parliamentary authorities yet). The issues of concern were:

First, the treaty seemed to include government bonds within its ambit (which is not the case in all such bilateral investment treaties).

Second, the treaty has specific vote requirements that differ from other treaties (e.g., 75% in the EU- Singapore agreement; 66.67% in the EU-Canada one) and that, if not followed, allow investors to bring treaty-based claims.

One concern raised by the report is that such treaties – perhaps inadvertently, perhaps intentionally – can make future restructurings of Euro area sovereign bonds harder by granting investors in certain countries additional rights that could enable them to block restructuring attempts.

Here are our preliminary thoughts, focusing on the EU-Singapore treaty:

Republic and PDVSA Bonds: No Trades With Friends and Family

Mark Weidemaier and Mitu Gulati

A few days ago, we wondered why the U.S. government had constrained U.S. holders of PDVSA debt instruments to sell only to non-U.S. parties. The constraint would likely kill liquidity for these bonds and impose losses on bondholders. But why? And why impose the constraint on PDVSA bonds but not the Republic’s bonds?

On Friday, the Treasury apparently amended the sanctions order to impose the same constraint on the Republic’s bonds. Now these too can only be sold to non-U.S. persons.

But again, why?  Venezuela hasn’t issued new bonds for a while, so why kill the secondary market for existing bonds? 

Here are four possible explanations; we’d be grateful to hear others from readers:

1.    Cut Off Oxygen: Venezuela has made a habit of issuing bonds and then parking them in domestic financial institutions, for later sale when the government is low on cash. Counterparties have been willing to accept these bonds in the hope that a future government will pay, even if the current one won’t. Perhaps the U.S. government believes Venezuela still has a stockpile of these parked bonds and is trying to eliminate this last source of oxygen for the Maduro government.

2.    What’s Coming is Brutal: Perhaps the U.S. government expects a brutal restructuring and wants to give U.S. holders an opportunity to escape by selling to non-U.S. parties. But query: If this is the story, why would anyone want to buy? (Ans: They wouldn’t, thereby reducing liquidity even further).

3.    Don’t Want Irate Bondholders Calling and Yelling at US Treasury Officials: This explanation is a version of the first one (Oxygen denial) and says that the U.S. wants to dramatically reduce the value of Venezuelan bonds in the short run, but not to zero, so that U.S. holders who really need to exit will still have a small escape window.

4.    Cut Venezuela Out of the Index: Nearly two years ago, Harvard economist Ricardo Hausmann urged JP Morgan to remove Venezuelan bonds from its index (see here, for Hausmann’s now-famous “Hunger Bonds” article). Venezuela needed to solve a humanitarian crisis, not pay coupons to foreign bondholders. Hausmann understood that many investors would view Venezuelan bonds less favorably if the bonds were removed from JP Morgan’s index. Indirectly, the U.S. government might be trying to bring about this result. To stay in the index, a bond must be traded to some minimal degree. If the sanctions prevent this, Venezuelan bonds may be removed from index. But why would this matter to the U.S. government? Hausmann was worried about coupon payments being made to foreign creditors in lieu of assistance to the people of Venezuela. But Venezuela is not paying any coupons these days (except on the one collateralized PDVSA bond).

Explanations one and three seem most plausible to us. Perhaps the U.S. government is hoping for regime change in the near future. If so, the pain bondholders feel will be temporary and offset by gains once a reasonable government is in place. But if Maduro retains power, then the pain for U.S. holders of these instruments will be significant.

Euro Area Sovereign Bonds: CACs or no-CACs?

Mitu Gulati and Mark Weidemaier

Beginning January 1, 2013, Euro Area authorities required member countries to include “collective action clauses,” or “CACs,” in sovereign bonds with a maturity over one year. CACs are a voting mechanism by which a bondholder supermajority (e.g., 66.67% or 75%) can restructure bond terms in a vote that binds dissenters. Before 2013, the vast majority of sovereign bonds issued by Euro area countries not only lacked CACs; they essentially said nothing about restructuring. For much more on CACs, European and otherwise, see here, here and here.

Because of this policy change in 2013, almost every Euro Area sovereign has two sets of bonds outstanding: CAC bonds and no-CAC bonds. Is either type of bond safer for investors to hold in the event of a restructuring?

On the Attachability of Blocked Venezuelan Assets

Mark Weidemaier and Mitu Gulati

We gather that there is still activity in the U.S. government to think through the implications of the recent expansion of sanctions against Venezuela. Here’s the original version of the most relevant Executive Order. In brief, it provides: “All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in…” The new sanctions add PDVSA to the blocked list.

One question is whether this stops the Crystallex attachment proceeding in its tracks. After all, shares in PDV-H are an interest in property owned by PDVSA, and an execution sale is nothing if not a transfer of assets. To spin this out even further, what about the shares in CITGO-H, which were pledged as security for the PDVSA 2020 bonds? If the sanctions extend to property owned by entities controlled by PDVSA, then the sanctions would also seem to block holders of the PDVSA 2020s from foreclosing (without first getting a special license). These complexities will require clarification; perhaps Treasury will provide it soon.

More broadly, let’s assume that the effect of the sanctions is to divert a significant pool of assets into some blocked accounts in the U.S. As we said in our prior post, we are skeptical that there is a big pool of assets, but we might be wrong. Let’s further assume that the U.S. administration eventually declares that Juan Guaidó and associates, as the officially-recognized leaders of Venezuela, have access to the funds. Are the funds now attachable by Venezuela’s creditors (like Crystallex)? At least as a formal matter, the answer would seem to be “yes.” The assets would no longer be blocked, and would also seem to belong to the government. Creditors with claims against the government would be entitled to assert claims (subject to the law of foreign sovereign immunity). Yet this can’t be the intended result—or so we hope. It would effectively divert government assets to a handful of creditors, enabling them to achieve disproportionate recoveries (compared to other creditors) at the expense of the Venezuelan people. We hope the administration will make clear this is not the intent.

What is the U.S. Government’s Strategy in Venezuela?

Mark Weidemaier and Mitu Gulati

Even by the eccentric standards of its ongoing debt crisis, weird things are afoot in Venezuela. Opposition leader Juan Guaidó has declared himself president and been recognized by the U.S. and other governments. That’s not especially weird. What’s odd is that the political convulsions in Venezuela are manifesting in part as a battle over control of the CITGO board. Guaidó has said he plans to appoint a new board. Rumors are circulating that this is part of a plan, assisted by the U.S. government, not just to cut off the flow of oil revenues to the Maduro regime but to redirect that flow towards opposition coffers. As the Wall Street Journal previously reported: “U.S. officials say they want to divert oil money--as well as control over other assets like gold reserves--away from Mr. Maduro to the new interim president without stopping crude exports from the country.” That’s also consistent with a recent statement recently put out by the U.S. Treasury. 

Since these reports, the U.S. administration announced new sanctions, which don’t direct funds to opposition coffers but which do appear intended to prevent CITGO from remitting oil-related payments to Venezuela. Instead, the funds must be held in blocked accounts in the U.S. Here’s Bloomberg on the sanctions, and the Wall Street Journal, and Reuters, and the New York Times.        

What’s going on here?

Puerto Rico’s Audacious Move: Can it Cut its Debt by $6 bn?

Mitu Gulati & Mark Weidemaier

Last week, the Government of Puerto Rico, acting through the Financial Oversight and Management Board (and in conjunction with the creditors’ committee), filed a claims objection seeking to invalidate roughly $6 billion of its General Obligation debt. The reason is that the government allegedly borrowed in violation of the Debt Service Limit and the Balanced Budget Clause of the Puerto Rican constitution. Stephen’s recent post on this subject discusses the merits of this argument in some detail. In this post, we are especially interested in the question of restitution. The Commonwealth doesn’t get much benefit from invalidating loans unless it also avoids the obligation to pay restitution (i.e., return the purchase price). So the objectors make the additional argument that bondholders have no equitable right to restitution under a theory of unjust enrichment.

There is some precedent for the objectors’ arguments in similar contexts, although not a lot of it. Some of the important cases, such as Litchfield v. Ballou (1885), are also very old. However, at least one law review article—a student note in the North Carolina Banking Institute journal (here)—squarely addresses Puerto Rico’s argument, ultimately concluding:

How can Puerto Rico’s penalty for illegally borrowing above its means be that it is allowed to declare the debts void and keep the money for itself? Despite the manifest unfairness of such a result, the applicable law indicates that this is likely the proper legal result.

Who Went to Caracas Last Week?

Mitu Gulati & Mark Weidemaier

More and more creditors are filing lawsuits against Venezuela, and we had been planning to do a post on how the dominos were falling. 

But then we came across a piece by Ben Bartenstein of Bloomberg about how some investors appear to be pursuing an alternate strategy, allowing bondholders to be compensated from oil-related activities. One can understand why creditors would rather have a future claim to oil revenues than litigate over unpaid bond debt. After all, Venezuela has huge oil reserves, and the current Venezuelan government is sure to lose power eventually. Although it may take a while, a government will eventually be in place capable of resuming oil production, and in that event, investors could make a bundle.

Good for investors, but terrible for the future government and the people of Venezuela. Having finally rid themselves of Maduro, they would have to deal with the fact that he and his cronies had either stolen the country's assets or pledged them in exchange for a temporary reprieve from creditors. This is not a new issue. It implicates the problem of odious debts, for which Venezuela is quickly becoming a poster child. (Ugo Panizza and Ricardo Hausmann have a nice piece about the need for Odiousness Ratings in the Venezuelan context.)

Ukraine Wins Appeal in Russian Bond Case

Ukraine and Russia have been battling it out in English courts over whether Ukraine must repay a $3 billion Russian loan from 2013. The loan was unusual both in structure and in substance. For example, although essentially a bilateral loan, it was structured as a tradable Eurobond and held by the Russian sovereign wealth fund. The indenture trustee has been suing to enforce the loan. In March 2017, the High Court of Justice granted summary judgment for Russia. Although Ukraine had a number of plausible defenses to enforcement of the loan, the judge rejected them all. Here's Bloomberg, with coverage of that decision and of the ensuing appeal. Today, the Court of Appeal reversed that decision, sending the case back for discovery and a trial. Here's the decision, which Russia will appeal according to this Financial Times report.

Timing and Process in Crystallex v. PDVSA

[Updated with Crystallex's brief opposing the stay.]

In an earlier post, I noted some open questions that had to be answered before Crystallex could execute on PDVSA’s 100% ownership stake in PDV Holding (PDV-H). To recap: The federal district judge in Delaware let Crystallex attach the PDV-H shares on the theory that PDVSA is the Venezuelan government’s alter ego. The open questions relate both to timing (e.g., should there be a stay of execution pending appeal?) and process (how should an execution sale proceed)? A lot turns on the answers to these questions, as I’ll discuss below. First, however, here’s a simplified figure showing PDVSA’s corporate structure for readers who haven’t been following the dispute closely.

Some Thoughts on the Alter Ego Ruling in Crystallex

I have had a bit of time to digest the district court’s ruling that PDVSA is Venezuela’s alter ego, and here are some preliminary thoughts. The opinion is 75 pages and covers a lot of ground, but I’ll focus on perhaps the most important and least technical question: Is the case a one-off or a harbinger? Put differently, assuming the ruling stands after appeal and further proceedings in the district court, does it definitively establish that PDVSA is Venezuela’s alter ego? If so, the ruling could have important consequences for a future attempt to restructure the debts of both entities.

The answer isn’t clear. Or rather, it depends whether one wants a formal or a functional answer. Formally, the decision is a one-off; it need not have implications for future alter ego determinations. Functionally, however, the decision creates real risks for PDVSA and the government.

Court Lets Crystallex Attach Equity in CITGO Parent

[Edit: Here is the opinion, with redactions related to the OFAC license.]

Just a quick post for now, as the court is keeping its opinion under seal for the time being. Crystallex, a creditor of Venezuela, has been trying to enforce its claims by attaching PDVSA's equity interest in PDV Holding, the ultimate U.S. parent of CITGO. For more background, there have been a number of posts already here on Credit Slips. The district judge overseeing the action in Delaware has just granted Crystallex's request.

I'll have more to say once the opinion becomes public, although portions will undoubtedly be redacted in that version. The secrecy seems to be associated with an OFAC license obtained by a third party (presumably the entity financing this litigation), which Crystallex believes authorizes attachment notwithstanding U.S. sanctions against Venezuela. Those sanctions require OFAC authorization for "attachment of an equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest" (see FAQ 596) and define "Government of Venezuela" broadly to include PDVSA. I assume the redactions will mostly affect this part of the opinion.

Even more important, the opinion will have to explain why Crystallex, a creditor of Venezuela, can attach PDVSA's property. Presumably the reason is that the court has found the two entities to be alter egos. If so, that's an important ruling that may have much broader consequences in any attempted restructuring of PDVSA or Republic debt.

Edit: I should add that the fact that the court has issued the writ does not necessarily mean Crystallex will immediately be allowed to execute. Leaving aside any delay associated with appeal, the district judge has previously distinguished the decision to issue the writ from the decision to allow execution. Any attempt to execute the writ will also raise new questions. For instance, must there be an attempt to sell the shares? If not, how should the shares be valued (since Crystallex is only entitled to receive the amount of its judgment plus interest)?