Unlawfully-Issued Sovereign Debt

In 2016, its economy in shambles and looking to defer payment on its debts, the Venezuelan government of Nicolás Maduro proposed a multi-billion dollar debt swap to holders of bonds issued by the government’s crown jewel, state-owned oil company Petroleós de Venezuela S.A. (PDVSA). A new government now challenges that bond issuance, arguing that it was unlawful under Venezuelan law. Bondholders counter that this does not matter, that PDVSA freed itself of any borrowing limits by agreeing to a choice-oflaw clause designating New York law. The dispute over the PDVSA 2020 bonds implicates a common problem. Sovereign nations borrow under constraints imposed by their own laws. Loans that violate these constraints may be deemed invalid. Does an international bond—i.e., one expressly made subject to the law of a different jurisdiction—protect investors against that risk? The answer depends on the text of the loan’s choice-of-law clause, as interpreted against the backdrop of the forum’s rules for resolving conflict of laws problems. We show that the choice-of-law clauses in many international sovereign bonds— especially when issued under New York law—use language that may expose investors to greater risk. We document the frequent use of “carve-outs” that could be interpreted to require the application of the sovereign’s local law to a wide range of issues. If interpreted in this way, these clauses materially reduce the protection ostensibly offered by an international bond. We explain why we think a narrower interpretation is more appropriate. We close by exploring implications of our findings, including for the dispute over the PDVSA 2020 bonds