Publish in Legal Briefs - Wednesday, February 5, 2020
The Venezuelan Creditors Committee denies a report that said that Venezuela was off the hook on unpaid interest to any creditor after three years. (Photo: SIBCE)
Statement of the Venezuelan Creditors Committee Regarding 'Prescription Clause'
BY LATINVEX STAFF
EDITOR’S NOTE: Cleary Gottlieb, the legal advisor for the Venezuelan Creditors Committee, released this statement on February 3, 2020.
On January 30, 2020, Bloomberg published a story incorrectly asserting, among other things, that "Buried deep inside the prospectus of every [Venezuelan] sovereign bond issued since 2005, or nearly $30 billion worth, is a little-known clause that lets Venezuela off the hook on unpaid interest to any creditor after three years – provided the creditor doesn't take legal action seeking repayment during that span. Known as a 'prescription clause,' it cuts the standard statute of limitations in half for bonds governed by New York law. So with the third anniversary of the country's default coming in November, creditors caught unawares could wind up forfeiting billions of overdue interest payments. None of the bondholders contacted by Bloomberg News said they were aware of the clause."
The premise of the Bloomberg story is, to put it starkly, wholly false, as a careful reading of the clause in question makes clear. New York law, which is the law governing bond issues by Venezuela, provides that claims for principal and interest are prescribed (in essence barred) if not pursued within a period of six years. The provision in Venezuela's Fiscal Agency agreement referred to in the Bloomberg article does not shorten the period during which bondholders with unpaid claims for principal or interest may pursue their claims. As is clear in the text of the provisions cited, the three-year period referenced in the Fiscal Agency agreement is not triggered until the Fiscal Agent has received payment of the full amount due and notified bondholders thereof. As is well known, Venezuela is in default of virtually all bond payments and no Fiscal Agent has received any such payment on any of the relevant Venezuelan bonds. Thus, the contractual three-year limitations period has not begun to run.
Specifically, the relevant documentation states:
"Claims in respect of principal and interest will become void unless presentation for payment is made within a period of ten years in the case of principal and three years in the case of interest from the Relevant Date, to the extent permitted by applicable law. "Relevant Date" means whichever is the later of
(i) the date on which any such payment first becomes due and
(ii) if the full amount payable has not been received by the Fiscal Agent on or prior to such due date, the date on which, the full amount having been so received, notice to that effect shall have been given to the Bondholders." (emphasis added).
Given the definition of "Relevant Date" and in particular because of the use of "the later of" formulation, the purpose of the Prescription clause is to establish a limitations period only if the Fiscal Agent is holding funds from the issuer that it has not disbursed (a situation that is never likely to occur and that if it did occur would implicate the responsibility of the Fiscal Agent). The limitations period is not triggered if the issuer fails to cause interest or principal to be paid to the Fiscal Agent (i.e., a traditional payment default). Note, however, that the New York statutory limitations period of six years still applies.
The Venezuela Creditors Committee examined this issue a long time ago. After the Bloomberg story appeared, its representatives immediately contacted the Bloomberg reporter, walked him through the correct interpretation of this clause and requested that he correct his story. To date, Bloomberg has not done so. It is regrettable that an ill-advised and erroneous news report has created unnecessary noise in the market.