Last week, President Trump issued Executive Order 13835, further tightening sanctions on Venezuela.  The Executive Order had three new prohibitions, barring all transactions relating to the following:

• the purchase of any debt owed to the Government of Venezuela, including accounts receivable;
• any debt owed to the Government of Venezuela that is pledged as collateral after the effective date of this order, including accounts receivable; and
• 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.

Many of the implications of the Executive Order are self-evident.  The new Executive Order targets factoring and other financing arrangements involving either a transfer or pledge of debt owed to the Government of Venezuela.  Given the breadth of prior OFAC definitions of “debt,” this is likely broad enough to pick up any sale of third-party bonds or other debt securities held by the Government of Venezuela for which a Government of Venezuela issuer is not the obligor (bearing in mind that Executive Order 13808 already restricts bonds issued by the Government of Venezuela, including any entity owned or controlled by the government).  The Executive Order also prohibits any transaction involving the sale, assignment, or pledge of equity in any entity 50% or more owned by the Government of Venezuela (which, again, includes all state-owned and state-controlled entities such as PdVSA).

The impact of the new prohibition on assigning or pledging equity collateral is less obvious.  Contrasting clauses (ii) and (iii), clause (iii) lacks an explicit restriction to collateral pledged after the date of the Executive Order, which called into question whether the ban on transactions relating to assignment or pledging of equity collateral related only to new assignments or pledges.  We understand from informal consultations with OFAC that it is likely that clause (iii) will not be limited to new equity pledges, meaning that, while persons acting within U.S. jurisdiction will remain free to trade secured debt within the parameters set out under Executive Order 13808, they will not be able to execute on equity collateral securing such debt without a license from OFAC.  This position, should it be confirmed in guidance due to be issued shortly, would affect a series of PdVSA bonds maturing in 2020 that are secured by a 51% interest in Citgo Petroleum.  The denial of a license would not release the security interest in the collateral but could prevent its sale and the application of proceeds.

OFAC’s position on whether liquidating bonds (or other securities) previously pledged as collateral by Government of Venezuela entities is an indirect sale of securities by or on behalf of the Government of Venezuela restricted by Section 1(b) of Executive Order 13808 remains unclear as of the date of this post but is another source of uncertainty that may result in a need for an OFAC license before executing on Government of Venezuela collateral in a transaction within U.S. jurisdiction.