Trade Alert: Venezuela

VENEZUELA

On 21 November 2021, 8.1 million Venezuelans, representing a 41.8 per cent turnout, voted in the regional elections. Nicolas Maduro’s Socialist Party dominated, winning at least 19 of the 23 states and a majority of municipalities, inflicting a further blow to Juan Guaido’s opposition, who returned to the ballot for the first time in 4 years due to frustrations with Maduro’s continued incumbency. The Opposition leader, Juan Guaido reflected: “Today is a time for reflecting amongst our leadership. It is not the time for fights nor egotism among political leaders”. European Union observers monitored the election and overall  found the election conditions to be better than previous years. However, the arbitrary bans on candidates and the withdrawal of opposition party leaders illustrates there are still improvements to be made.

On 1 October 2021, Venezuela redenominated its bolívar due to hyperinflation, removing six zeros. One new ‘digital bolívar’ is equivalent to 1m bolívar, with the exchange rate equalling USD0.24. This is the second time in 3 years that Venezuela has had to reconvert its currency when in July 2018 Maduro removed five zeros. The hyperinflation has created alternative mediums of exchange throughout Venezuela, with 90 per cent of transactions in the region of San Cristobal, on the border of Colombia, using the Colombian Peso and drastically to the east, in Tumeremo-El Callao, transactions are facilitated using Gold.

Despite Venezuela having the world’s largest oil reserves its oil production has declined dramatically. The oil output for October surpassed 700,000 barrels-per-day with Iran lessening the impact of the U.S. sanctions which have been in place since 2014. This was a 76 per cent increase on September. However, it is still short of Maduro’s 2 million barrels-per-day target set in January 2020 and far shorter than Venezuela’s peak of 3.5 million in the 1990s. 

SPECIAL THANKS

We appreciate the assistance of Pedro Luis Planchart Pocaterra at ARAQUEREYNA with the following discussion on Venezuelan law, regulation and practice.

VENEZUELA LEGAL SYSTEM

The Bolivarian Republic of Venezuela is a federal republic comprised of 23 states, two federal territories, one capital district and 11 groups of islands (the so called, federal dependencies). The political system is made up of mainly executive, legislative and judicial powers. The country’s most recent constitution, which was ratified by referendum in 1999, added two new governmental branches: (i) the citizen power; and (ii) the electoral power. The constitution calls for an active government that promotes cultural, economic and social rights, in addition to civil and political rights. Venezuela has a civil law system with roots in Roman law. The Tribunal Supremo de Justicia ("Supreme Tribunal of Justice") heads the Venezuelan judicial system.

KEY POINTS FOR TRADERS

• No banking licence is required to lend in Venezuela.
• Debt trading can occur by way of assignment but notice must be given to the debtor and the guarantor.
• Lenders in Venezuela will be subject to Income Tax and Stamp Tax if the credit instruments are issued in Venezuela by financial entities subject to the Decree with force of Law of the Banking Sector Institutions.

BANKING LICENCE REQUIREMENTS

Venezuela does not have eligibility requirements for lenders and does not require lenders to be licensed or authorised to do business in Venezuela. However, in determining the applicable income tax regime, the nature of the lender is significant. Non-bank lenders are subject to a 34 per cent tax rate on net income (in absence of a tax treaty provision) and local financial institutions are subject to a 40 per cent tax rate. Despite the lack of banking licence requirement in Venezuela, it does not afford a lender an automatic right to lend in Venezuela as trade sanctions and “other operational challenges” may present difficulties in lending.

METHOD OF TRANSFER

To assign a loan, notice must be given to the debtor and the guarantor, pursuant to Venezuela’s Civil and Commercial Codes. There may be additional conditions for the transferability of the loan in accordance with the loan documents. Depending on the type of lender there are differing authorisations required to be a beneficiary of a chattel mortgage and pledge without transfer of possession. If the lender is a local bank no authorisation is necessary however, the Superintendency of the Banking Sector Institutions’s authorisation will be required if the lender is a foreign bank. Depending on the nature of the properties and/or interest subject to the chattel mortgage or the pledge without the transfer of possession, authorisation from other agencies may be necessary in favour of other types of lenders with regards to certain security interests.  

SECURITY AND TRUSTS / AGENCY

Trust and security agency structures are utilised in Venezuela. The trustee must be a local bank or insurance company authorised to operate as such. Depending on the nature of the security interest being created, some formalities (notarisation/and or registration of the document empowering the security agent) might be required.

TAX AND STAMP DUTY CONSIDERATIONS

Interest payments made to foreign lenders are subject to withholding tax, typically at 4.95 per cent. Interest payments to local banks are not subject to withholding tax but they are subject to stamp taxes if the credit instruments are issued in Venezuela by financial entities subject to the Decree Force of Law of the Banking Sector.

FORMALITIES, NOTARY REQUIREMENTS AND ENFORCEABILITY

For security interests on properties located in Venezuela, fees are required for registrations and are determined on the value assigned to the security interest. Notarisation fees are calculated in accordance with the particulars of the document and not the type or value of the assets. If the security interests are on properties or rights not located in Venezuela, the creation, perfection and enforcement of the security interests is not governed by the laws of Venezuela, regardless of whether the borrower and/or owner of the secured properties or rights is an individual or corporate legal entity domiciled in Venezuela.

Venezuelan courts will recognise a foreign governing law of a contract and will enforce such a contract in Venezuela, absent exceptions for national interest contracts and public policy reasons. To recognise and enforce a foreign judgment requires a procedure before the Supreme Court but does not require an examination of the merits. Under the Venezuelan 1998 Commercial Arbitration Act and as a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Venezuela recognises foreign arbitral awards.

To enforce collateral security, Venezuelan procedures require a public auction that takes place at, and is controlled by, the competent court. Except for pledges on bank accounts, self-help provisions to seize property on collateral security interests located in Venezuela are not valid. 

SPECIAL MENTION

We congratulate Brown Rudnick’s Corporate Practice Partner Adolfo Garcia for his recognition in Latinvex’s “Latin America’s Top 100 Lawyers.”

Brown Rudnick’s Latin America team has extensive experience on a broad range of matters, including representing companies with cross-border business opportunities, litigation, and arbitration across the globe.

LMA EXPOSURE DRAFT OF STANDARD TERMS AND CONDITIONS

On 1 November 2021, the Loan Market Association (“LMA”) published an updated exposure draft of its Standard Terms and Conditions for Par and Distressed Trade Transactions (Bank Debt/Claims) (the “LMA STCs Exposure Draft”), alongside an explanatory note to the LMA STCs Exposure Draft, example Settlement Amount calculations, and updated exposure drafts of the bank debt, claims and risk participation forms of LMA Trade Confirmation. The exposure drafts reflect proposed amendments to the current LMA documents based on recommendations from the Working Group on Sterling Risk-Free Reference Rates (the “Working Group”). The LMA STCs Exposure Draft seeks to accommodate secondary trades which relate to loans under facilities reflecting terms of the Compounded Rate/Term Rate Facilities Agreements and facilities under which interest continues to be calculated on the basis of IBOR rates.

The proposed changes to the current LMA secondary trading standard terms and conditions (last amended on 1 January 2021) mainly impact Condition 11 (Delayed Settlement Compensation) and the associated definitions. The LMA STCs Exposure Draft incorporates the recommendation of the Working Group for sterling and other risk free rate currencies, whilst retaining the current framework dealing with traded loans denominated in an IBOR rate currency, but with a change in how parties address unavailability of the relevant rate for the IBOR rate currency of the traded loan. Presently, the seller (acting reasonably) specifies the rate for cost of carry in such situations where the IBOR rate (currently 1-month IBOR) is unavailable. Under the LMA STCs Exposure Draft, such fall-back rate would instead be the daily simple risk free rate for that currency, and if that rate is also unavailable, the central bank rate. For trades involving a risk free rate loan, cost of carry under the LMA STCs Exposure Draft will be calculated by reference to the simply daily risk free rate for the relevant currency, with parties having the optionality to elect whether a compounded index should instead be used.

The exposure drafts of the LMA Trade Confirmations reveal proposed changes to the “Other Terms of Trade” section where tick-boxes have been added or removed as follows:

• tick-box for disapplication of Credit Adjustment Spread from cost of carry rate added;
• tick-box for application of zero-rate floor in cost of carry calculation added;
• tick-box for disapplication of buy-in/sell-out provisions removed; and
• tick-box for specification of fallback cost of carry rates for certain currencies removed.

The LMA STCs Exposure Draft and related exposure drafts of the LMA Trade Confirmations are yet to be adopted and as such trading counterparties should continue to refer to the LMA Standard Terms and Conditions for Par and Distressed Trade Transactions (Bank Debt/Claims) published on 1 January 2021 for trades executed on or after that date. Timing for final publication of revised terms and conditions and related trading documentation is presently unconfirmed but we will issue a further update as and when any changes are adopted.”

NOTABLE TRANSACTIONS

PETROLEOS DE VENEZUELA

(“PDVSA”) 

On 19 August 2021, Petroleos de Venezuela (PDVSA), the state-owned oil refinery, announced that it had agreed a debt-for-equity restructuring with  PATSA Ltd. The deal saw PDVSA’s subsidiary PDV Caribe S.A exchange its 49 per cent stake of Refidomsa, an oil refinery in Santo Domingo, Dominican Republic, for PDVSA bonds held by PATSA Ltd. Thereafter, PATSA Ltd sold the 49 per cent shareholding of Refidomsa to the Dominican Government for USD86.5m leaving the Dominican Government as the sole shareholder. A decade earlier, PDVSA bought the minority stake in Refidomsa off the Dominican Government for USD135m as part of its Petrocaribe initiative.  

Now priced at 24 cents on the dollar, the Venezuelan bonds originally had a face value of USD361m. The bonds of PDVSA increased to 5.25 cents on the dollar with sovereign bonds up to 11 cents.

Despite the deep distressed levels of bonds and large outstanding debts to service this transaction has been welcomed. Francisco Rodriguez, previously head of Venezuela’s congressional budget office, stated: “The government knows that it can’t restructure its debt until sanctions are lifted. Anything they can do now when prices are low to retire some of the debt is going to place them in a better position for a restructuring.”

CITGO PETROLEUM CORPORATION

(“CITGO”)

On 15 November 2021, CITGO, the U.S arm of PDVSA, released its third quarter results indicating a net loss of USD4m, a decline in comparison to its net income of USD3m in the previous quarter. The third quarter saw its second consecutive quarter of positive EBITDA with USD194m.

CITGO’s refined products exports increased to an average of 136,000 barrels-per-day. Its total refinery throughput was down on the previous quarter, at 698,000 barrels-per-day, with the overall crude utilization at 85 per cent.

Chief Executive Officer Carlos Jorda stated: “While our quarterly results were challenged despite an improved market environment, we are working to address operational issues. Increased mobility is creating more demand for our products. I’m confident we are taking the necessary steps to finish 2021 strong.”

On 15 September 2021, the U.S. extended its Treasury Department licence protecting CITGO from creditors relating to the matured PDVSA’s 2020 bond. The extension will last until 21 January 2022, granting relief to the Venezuelan opposition government which controls the board. At present, the board of CITGO has been exploring talks with creditors to avoid disputes over their control of the oil refinery. Bondholders such as Crystallex International Corp and ConocoPhillips have been pushing for the sale of CITGO’s holding company PDV Holdings in an effort to retrieve their debt.

In light of the election results, creditors will be assessing Guaido’s suitability for opposition and whether they ought to retrieve their debt. Francesco Marani, head trader at Auriga Global Investors stated in September, “Guaido efforts to engage bondholders ahead of November elections is likely to short lived. Everyone wants to see what happens after the election.” 

VALE SOCIEDAD ANONIMA

(“VALE S.A”)

Vale S.A, the Brazilian mining company, released its 3Q21 financial statement on 29 October 2021. The group saw revenues increase to USD12.682bn with an ADJUSTED EBITDA of USD6.928bn and a net income of USD3.886bn. The mining company saw a decrease on the previous quarter with its Ferrous Mineral’s EBITDA at USD3.949bn due to a 31 per cent lower realised price for iron ore fines. Vale S.A. has revised its iron ore output for 4Q21 due to the low prices, predicting 4 million tonnes less. For 2022, the mining company warned it will reduce its output by 12 to 15 million tonnes if the low-price market continues.

The labour disruption at Vale’s Sudbury plant led to reduced revenues with its lower nickel by-product. The labour disruption has been concluded with a five-year collective bargaining agreement being agreed. The arrangement lasts until 31 May 2026, and it includes “significant monetary improvements for existing members and preserves retiree health benefits for all future hires”.

On 5 November 2021, Vale S.A sold its minority stake in the potash and phosphate mining company, The Mosaic Company for USD1.2bn. Vale S.A sold its 11 per cent stake, which it received as a share consideration for the sale of Vale Fertilizantes to Mosaic in 2018. The fertilizer industry has seen dramatically increased prices in the last year with Vale S.A exiting at the top of the market.   

NU PAGAMENTOS SOCIEDAD ANONIMA

(“Nubank”)

Nubank, the Brazilian fintech disrupting the retail banking sector, is seeking an initial public offering in New York with a valuation of more than USD50bn. If it meets expectations, it will become Latin America’s sixth largest company by market capitalisation.

Nu Holdings, parent company to Nubank, and the entity being placed on the NYSE, is to issue 289m shares with a price range of USD10 to USD11 a share, bringing the total raise to over USD3bn. The IPO will list on the NYSE with Brazilian Depositary Receipts (BDRs) trading on the Sao Paulo B3 Exchange. Each BDR will represent one sixth of the Class A ordinary share on the NYSE.

In its S-1 filing, Nubank increased its total revenue for the first 9 months to USD1,062.1m, double 2020’s figure. The fintech is still loss making, with USD(99.1m). However, its gross margin has increased to 46.9 per cent.

Founded in 2013, Nubank is based in Sao Paulo and has nearly 50m users on its mobile bank challenging the traditional banks. Earlier this year, on 8 June 2021, Berkshire Hathaway invested USD500m into Nubank bringing it a total valuation of USD30bn. 

MERCADOLIBRE INC

(“MercadoLibre”)

On 16 November 2021, MercadoLibre Inc, Latin America’s largest company by market capitalization, announced its equity offering of 1 million shares, priced at USD1,550 per share raising USD1.55bn. This equity offering is the e-commerce retailer’s first in over two years with the funds being raised to contribute towards “general commercial purposes”.  

Andre Chaves, Senior Vice-President at MercadoLibre outlined: “Our current cash generation profile is enough to fund our upcoming investments, but we want the flexibility to accelerate without having to tape the markets in a hurry. Investors are focusing on the long-term story”. The e-commerce retailer has seen an upsurge of sales throughout the pandemic with its latest quarter realising USD7.314bn in gross merchandise volume.

On 14 January 2021, MercadoLibre issued USD1.1bn of bonds. First, its USD400m 2.375 per cent “2026 Sustainability Notes” and secondly, the USD700m 3.125 per cent “2031 Notes”. The former’s funds will be used to increase investment in financial inclusion, reduction of environmental footprint, social development and empowerment through education. The 2031 Notes will be used to repurchase MercardoLibre’s 2.00 per cent Convertible Senior Notes due in 2028 at a premium to their par value. 

CONTACT 

Please contact Louisa Watt or Iden Asl with any queries regarding this month's Trade Alert. 

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