Hitting the Brakes: How a Potential PDV Holding Bankruptcy Might Affect Venezuela and PDVSA Creditors

Abstract

Much has been written about the ongoing economic and financial crisis in the Republic of Venezuela, including its economic collapse, the shortage of basic food and medicine, the spread of poverty and disease and the mass exodus of its population. In the midst of the collapse of this failed state, Venezuela also faces an ever widening battle with its creditors who are pursuing billions of dollars in claims in courtrooms within and outside the United States. At the center of its debt fight with its creditors is the Republic’s national oil company, Petroleos de Venezuela, S.A. (“PDVSA”). PDVSA holds some of the Republic’s most valuable assets, including ownership of CITGO Petroleum Corporation (“CITGO”) through PDVSA’s wholly owned subsidiary PDV Holding Inc. (“PDV Holding”). PDV Holding (and its valuable downstream subsidiaries) are now squarely in the sights of a number of Republic and PDVSA creditors, some of whom are poised to obtain judgments or court orders in the U.S. that could ultimately result in PDVSA losing CITGO. For PDVSA, protecting against the seizure of PDV Holding’s interests in CITGO would seem to be of paramount importance: a successful exercise of remedies against PDV Holding’s ownership interests could trigger change in control provisions in CITGO debt and initiate a value-destructive chain reaction that could result in PDVSA no longer controlling a key strategic asset. In addition to the risk from Republic and PDVSA creditors, PDV Holding has pledged its shares of CITGO’s parent company as security for two PDVSA financing transactions, either of which could be called upon if PDVSA defaults. This article explores one dramatic option that the Republic and PDVSA could potentially take to forestall that result: a bankruptcy filing for PDV Holding under Chapter 11 of the U.S. bankruptcy code. Although clearly an option of last resort for the current Venezuelan regime, if made protectively, such a filing could provide PDV Holding with some breathing room to formulate a plan to safeguard its strategic interests, most notably its indirect ownership of CITGO, perhaps giving time for the Trump administration and/or the Venezuelan government to reset or modify their policies. This article explores some of the key issues that could precipitate a potential PDV Holding bankruptcy. This article explores some of the key issues that could precipitate a potential PDV Holding bankruptcy. In addition, we address a number of potential disputes that likely will arise in connection with such a filing, including potential actions that key creditor constituencies could take in response to such a filing.