Venezuela faces 25 expropriation cases
Thursday, April 09 2015 @ 09:30 AM AST
Contributed by: elijose
On 30 March, Canadian mining company Gold Reserve Inc (unrated) issued a press release regarding district court proceedings in Washington DC against Venezuela (Caa3 stable) , stating that the clerk “entered a default” against the sovereign on 27 March. We understand that the term “default,” in this case, is a legal status that does not carry financial repercussions at this time for Venezuela and does not constitute a credit event or missed debt payment. Nevertheless this ruling, along with similar impending ones for other cases, could further pressure Venezuela’s foreign currency liquidity at a time when the country faces a substantial external financing gap.
Venezuela currently faces 25 cases of pending arbitration in ICSID related to a series of companies whose assets were expropriated and are looking for compensation (see report exhibit). In the past year, ICSID closed three cases with awards that total approximately $3.2 billion in favor of Exxon Mobile Corporation (Aaa stable), Gold Reserve Inc and Owens-Illinois Inc (Ba2 stable).
We believe that the default judgment is a technical litigation term that means that since the defendant did not appear at the court, the plaintiff’s claims can be taken at their word. The court action is a procedural step in the process of obtaining a final judgment to confirm the award. According to the default language in Venezuela’s dollar-denominated bond offering memoranda, the failure to satisfy a final judgment, decree or order by a court of competent jurisdiction from which no appeal may be made within 30 days from the entry of any such order is considered a default event if the amount in dispute is greater than $100 million.
As per the Venezuela dollar-bond offering memoranda, a debt acceleration could be triggered if the holders of more than 25% of any particular dollar-denominated bond series declare the bonds immediately due and payable. All Venezuela dollar-denominated bonds are pari passu with all other Venezuela external public debt and contain cross default and cross acceleration clauses. In the event of non-payment of a final judgment, the pari passu clause would imply that all dollar-denominated bonds would be considered to be in default and would open the possibility of a debt acceleration.
We understand that there are no cross-default clauses between Venezuela’s debt instruments and those of the state-owned oil company, PDVSA (Caa3 stable), and that the recent court proceedings would not have a direct impact on PDVSA’s foreign currency bonds. We believe that the sovereign would likely settle the ICSID award claims rather than risk triggering a credit event, even though payment of a court judgment would further pressure Venezuela’s already tight external liquidity position.