Venezuela's 2016 bond deal put 50.1% of US oil refiner Citgo's parent up as security, now a US appeals court has rejected its bid to void the debt as a separate sale plan earmarks over $2 billion for the bonds

A US federal appeals court on Tuesday upheld the validity of bonds issued by Venezuela’s state-owned oil company Petróleos de Venezuela (PDVSA) that defaulted in 2019, ruling that the transaction did not require prior approval from the country’s National Assembly.The US Court of Appeals for the Second Circuit affirmed a lower court judgment that found the bonds enforceable under Venezuelan law. The ruling is significant because the bonds are secured by a 50.1% equity interest in CITGO Holding, the parent company of US oil refiner CITGO Petroleum, potentially allowing creditors to pursue the collateral to recover their dues.The decision follows a prolonged legal dispute over whether PDVSA had the constitutional authority to issue the bonds without legislative approval. The company and related entities had sought to have the transaction declared void, arguing that it violated Venezuela’s Constitution.The bonds traded flat on Tuesday at 114.25 cents on the dollar.The case centres on a 2016 bond exchange through which holders of PDVSA’s unsecured notes due in 2017 could exchange them for new, secured notes due in 2020. PDVSA offered the exchange as its financial position deteriorated following a significant fall in crude oil prices between 2014 and 2016.Holders representing about 39.4% of the outstanding principal on the earlier notes accepted the offer. In return, the new bonds were secured by a 50.1% equity interest in CITGO Holding, which PDVSA owned through a chain of subsidiaries.PDVSA’s board approved the exchange in September 2016, along with the relevant approvals from the Venezuelan government as its sole shareholder and the boards of its subsidiaries involved in the transaction.However, Venezuela’s National Assembly, then controlled by opposition parties, challenged the arrangement. It argued that Article 150 of the Venezuelan Constitution required legislative approval for national public interest contracts involving foreign companies.The assembly passed resolutions in 2016 rejecting the use of CITGO shares as collateral and, in October 2019, reiterated that the bond agreement violated the Constitution. PDVSA subsequently failed to make scheduled principal and interest payments on the 2020 notes in October 2019, triggering the dispute.PDVSA, its subsidiary PDVSA Petróleo and holding company PDV Holding argued that the bond exchange and the pledge of CITGO shares were invalid because the National Assembly had not authorised the transaction. They also contended that the assembly’s resolutions should be recognised by US courts under the act-of-state doctrine, which can prevent courts from questioning certain official acts of foreign sovereigns.The US District Court for the Southern District of New York ruled in favour of the creditors in September 2025. It concluded that the transaction was valid under Venezuelan law and that the act-of-state doctrine did not apply.The Second Circuit upheld that judgment. In examining Venezuelan constitutional law, the appeals court relied on interpretations by Venezuela’s Constitutional Chamber indicating that national public interest contracts requiring legislative approval are those entered into by the Republic or competent organs of the National Executive. PDVSA, as a state-owned enterprise within the country’s decentralised public administration, did not fall within that category, the court concluded.The appeals court also agreed that the act-of-state doctrine did not invalidate the transaction. It noted that the relevant agreements were executed in the United States, payments were due in New York and the collateral was held there. The doctrine’s territorial limitation therefore prevented its application to the dispute, the court said.The ruling strengthens the creditors’ position in their efforts to enforce the bonds and recover money owed following PDVSA’s default. However, the judgment does not mean that the creditors can immediately take control of the pledged CITGO shares.The case forms part of broader litigation over PDVSA’s ownership interests in CITGO and other claims against Venezuela. A separate proceeding in Delaware concerns the proposed sale of PDV Holding, which owns CITGO Holding. A court-approved plan for the sale and resolution of creditor claims commits more than $2 billion towards extinguishing at least two-thirds of the 2020 notes, according to the Second Circuit’s opinion.The approval of that sale remains under appeal in the Third Circuit. US sanctions have also constrained creditors’ ability to execute against the CITGO shares without the necessary authorisation.The Second Circuit’s decision resolves the appeal over the validity of the 2020 notes, while enforcement and recovery remain subject to the separate proceedings and applicable restrictions.You use AI every day. Now get your AI Quotient. Take the AIQ test.