On July 19, 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) confirmed through issuance of two new FAQs that Executive Order 13835 prohibits U.S. persons from attaching and executing judgments against equity collateral securing debt issued by Government of Venezuela state-owned entities, even if both the debt and the security interest pre-date sanctions. Specifically, Subsection 1(a)(iii) of the Executive Order prohibits “[a]ll transactions related to, provision of financing for, and other dealings in…the sale, transfer, assignment, or pledging as collateral by the Government of Venezuela of any equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest.” As we noted in a prior post, this prohibition is not limited to debt incurred or collateral pledged after the date of the Executive Order and so prevents executing on any collateral securing Government of Venezuela debt consisting of equity in state-owned or state-controlled entities absent a license from OFAC.
OFAC also concurrently released Venezuela General License 5 (GL 5), authorizing all transactions related to and other dealings involving a specific series of PdVSA 2020 8.5 percent bonds that would be otherwise prohibited by the Executive Order. Without GL 5, bondholders would be unable to enforce the pledge of 51% of the shares of Citgo Holding, Inc. related to the PdVSA 2020 8.5 percent bond. OFAC noted that GL 5 is intended to ensure that U.S. sanctions negatively affect the intended target—the Maduro regime—and not bondholders. As with all OFAC general licenses, the authorization of GL 5 does not require any further communication with or requests to OFAC for parties to engage in authorized conduct.
It bears noting that GL 5 is limited to the PdVSA 2020 bonds. As the FAQs confirm, despite OFAC’s broad language about protecting the expectations of creditors through the issuance of GL 5, the application of the ban against executing on SOE equity collateral securing existing debt was deliberate. Under the Executive Order, any other holders of debt secured by equity in an entity owned by the Government of Venezuela would still require a separate specific license from OFAC for execution on the underlying collateral in the event of a default, to the extent any related transaction were to fall within U.S. juridiction. OFAC stated in new FAQ 596 that it will consider such license applications on a case-by-case basis.