DEBT-TO-EQUITY SWAPS IN VENEZUELA'S RESTRUCTURING LANDSCAPE: Contractual Design, Legal Constraints, and the Conditions for Viable Debt Conversion

Juan Carlos Andrade Santamaria

February 2026

ABSTRACT

This paper examines debt-to-equity swaps as a mechanism for addressing Venezuela's protracted sovereign and quasi-sovereign debt impasse. Drawing on sovereign debt theory, comparative restructuring experience, and the 2026 reform to the Organic Hydrocarbons Law, the paper argues that equity-based and revenue-linked debt conversions represent a structurally superior instrument for Venezuela's specific political economy relative to conventional cash-flow rescheduling or haircut-only approaches — but only under conditions that are currently absent or fragile. The paper develops a theoretical framework grounded in Bolton and Skeel's creditor coordination theory, the IMF's state-contingent debt literature, and the contractual innovation tradition exemplified by Sri Lanka's 2024 restructuring, to articulate the precise legal, institutional, and sanctions-architecture preconditions that must be satisfied before equity-based settlements become executable at scale. The analysis proceeds through three registers: (i) a comparative assessment of historical and recent debt-equity programs in Venezuela, Ecuador, Argentina, Zambia, and Ghana; (ii) a structural critique of the sanctions regime as the binding constraint on transaction design; and (iii) a disaggregated analysis of creditor heterogeneity and the collective action obstacles that explain why theoretically available instruments have not been deployed since 2018. The paper concludes that debt-to-equity swaps can function as a load-bearing component of Venezuela's eventual normalization strategy, but that their effectiveness depends on resolving four identifiable threshold conditions: credible statutory title, sanctions-compliant payment architecture, enforceable governance covenants, and a mechanism to overcome the holdout problem inherent in Venezuela's highly fragmented creditor base.

Keywords: Sovereign debt restructuring; debt-to-equity swaps; Venezuela; PDVSA; state-contingent debt instruments; OFAC sanctions; hydrocarbons law; collective action; contractual design.

1. Introduction: The Restructuring Deadlock and Its Instruments

Venezuela presents one of the most complex sovereign debt workouts in contemporary international finance. Since 2017–2018, when the Republic and Petróleos de Venezuela, S.A. (PDVSA) effectively ceased servicing their international obligations, approximately USD 60 billion in bonded debt — plus substantial bilateral claims held by China and Russia, ICSID arbitration awards, and commercial supplier credits — has remained in default without a comprehensive restructuring framework.¹

The persistence of this deadlock, nearly a decade after the initial default events, is not adequately explained by the sheer quantum of debt or by Venezuela's repayment capacity alone. It reflects a structural intersection of factors that conventional debt theory does not fully capture: a sanctions architecture that both constrains negotiation and selectively preserves enforcement leverage for different creditor classes; a domestic legal and constitutional framework that imposes layered approval requirements on any public-sector debt conversion; extreme creditor fragmentation across classes with incompatible legal remedies and divergent incentive structures; and a political economy in which the current administration has had limited incentive to initiate a comprehensive workout.²

This paper engages with a specific question that has received insufficient analytical attention: under what conditions can debt-to-equity swaps function as a viable, scalable instrument for Venezuela's restructuring? The question is not merely descriptive. Swap structures are routinely invoked in practitioner commentary as a solution to Venezuela's impasse, but the academic literature has not systematically examined the threshold conditions that determine when such instruments are executable versus when they remain theoretical possibilities. The paper advances a threefold argument. First, equity-based debt conversions are structurally superior instruments for Venezuela relative to rescheduling or haircut approaches, because they align creditor recovery with productive asset performance rather than sovereign cash-flow capacity — which remains genuinely uncertain in the medium term. Second, this structural superiority is presently unrealized because four identifiable threshold conditions remain unsatisfied: statutory title, sanctions architecture, governance covenants, and collective action resolution. Third, the 2026 reform to the Organic Hydrocarbons Law (LOH) materially advances one of these conditions — the statutory basis for project-level commercialization — but does not, by itself, resolve the others.

The paper proceeds as follows. Section 2 situates the analysis within sovereign debt theory and the academic literature on state-contingent and equity-linked instruments. Section 3 examines Venezuela's historical debt-equity programs and the 2021 REFIDOMSA transaction as empirical benchmarks. Section 4 analyses the Venezuelan legal and constitutional framework governing debt conversions. Section 5 provides a structural critique of the sanction’s architecture as the binding constraint. Section 6 examines the implications of the 2026 LOH reform. Section 7 disaggregates Venezuela's creditor base and analyses collective action obstacles. Section 8 draws comparative lessons from Ecuador, Argentina, Zambia, Ghana, and Sri Lanka. Section 9 identifies the threshold conditions for viable swap execution. Section 10 concludes.

2. Theoretical Framework: Sovereign Debt, Equity Instruments, and the Limits of Restructuring Theory

2.1 Creditor Coordination Theory and the Case for Equity-Linked Instruments

The foundational challenge in sovereign debt restructuring is the absence of an insolvency regime analogous to domestic corporate bankruptcy. Bolton and Skeel's influential analysis of the gap between sovereign and corporate debt resolution identifies the core difficulty: without an automatic stay on creditor enforcement or a binding plan of reorganization, sovereigns face a collective action problem in which individual creditor enforcement incentives diverge sharply from the aggregate welfare-maximizing outcome.³

Buchheit and Gulati's work on creditor coordination mechanisms, and Olivares-Caminal's analysis of the legal architecture of sovereign debt restructuring, converge on the proposition that successful workouts require instruments capable of creating sufficient distributional certainty to overcome holdout incentives.⁴ Equity-linked instruments address one dimension of this problem: by tying creditor recovery to observable productive performance — rather than to sovereign fiscal capacity, which is notoriously difficult to verify — they reduce the information asymmetry that enables strategic behavior.

2.2 State-Contingent Debt Instruments: Promise and Limitations

The IMF's 2017 policy paper on state-contingent debt instruments (SCDIs) articulated the theoretical case for linking sovereign debt service to macroeconomic variables such as GDP, commodity prices, or export revenues, arguing that such instruments provide "countercyclical relief" and better align payments with capacity to pay.⁵ The African Legal Support Facility's 2020 debt guide elaborated this framework for resource-dependent economies, noting that commodity-price-linked instruments "could potentially provide a stabilizing force" by reducing debt service when export revenues fall.

However, the IMF's own analysis acknowledges a significant puzzle: despite their theoretical appeal, SCDIs have had limited real-world uptake. The reasons are instructive for Venezuela's case. First, the novelty premium problem: investors demand compensation for the complexity and illiquidity of instruments whose payoff functions are difficult to price, a dynamic documented in the secondary market performance of Argentina's GDP warrants issued in 2005.⁶ Second, the moral hazard problem: if debt service is reduced when economic performance is poor, governments have diminished incentives to maximize reported output or export volumes, creating measurement manipulation risks.⁷ Third, the legal enforceability problem: the practical use of observable triggers (GDP, commodity prices) requires reliable data publication and credible dispute resolution — conditions that are particularly fragile in sanctioned or institutionally weak environments.

Venezuela's case does not simply add to this debate; it tests its limits. The country's data reliability problems — PDVSA's reporting has deteriorated significantly since 2014, and oil production statistics are contested — mean that production-linked or revenue-linked triggers must be engineered with extraordinary contractual care. The Sri Lanka restructuring of 2024 provides a recent and instructive comparator: its Governance-Linked Bonds (GLBs) embedded information disclosure covenants that created legal obligations to publish audited financial data, with non-compliance constituting a technical default rather than merely a penalty rate adjustment.⁸ This approach — using the bond's legal architecture to manufacture data reliability rather than assuming it — is directly transferable to Venezuelan equity instruments.

2.3 Debt-to-Equity Swaps in Sovereign Restructuring: Theoretical Positioning

Debt-to-equity swaps occupy a specific niche within the broader SCDI literature. Unlike GDP-linked bonds or commodity warrants, which retain the legal form of debt while adding a contingent payoff component, equity conversions change the fundamental nature of the creditor's claim: from a right to receive periodic payments on a defined schedule to an ownership interest — or economic equivalent — in a productive asset.⁹

For Venezuela, this distinction matters for two reasons. First, in the Venezuelan legal framework, the classification of an instrument as debt or equity determines which regulatory approvals are required, which constitutional provisions apply, and which international treaty protections (including bilateral investment treaty coverage) are available to the investor. Second, from a creditor incentive perspective, an equity position in a productive hydrocarbon’s asset is potentially more valuable than a rescheduled sovereign payment obligation, because it provides exposure to the upside of production recovery while limiting exposure to Venezuela's broader fiscal and governance uncertainty.

The theoretical contribution of this paper is to integrate these considerations into a unified framework: debt-to-equity swaps are superior instruments for Venezuela not because they are generically efficient (the literature on privatization-linked swaps in emerging markets is mixed), but because they are specifically suited to Venezuela's institutional configuration — a hydrocarbons economy with existing mixed-company structures, where equity participation is both legally familiar and operationally meaningful, and where the alternative (sovereign cash-flow rescheduling) offers creditors a claim on a fiscal capacity that is genuinely uncertain and heavily encumbered by sanctions.

3. Venezuelan Precedents: Historical Programs and the REFIDOMSA Transaction

3.1 The 1980s–1990s Debt-Equity Conversion Program

Venezuela operated a formal debt-equity conversion program between 1986 and approximately 1992, operating within the broader Latin American debt crisis response framework that also produced comparable programs in Chile, Argentina, Mexico, and Brazil.¹⁰ The Venezuelan program permitted holders of eligible external commercial bank debt to exchange their claims at a Central Bank administered discount window for bolivar-denominated proceeds that could be invested in approved sectors, subject to investment and repatriation lock-up periods.

Available data suggest that the program retired approximately USD 1.8 billion in external commercial bank debt at average conversion rates of 75–85 cents on the dollar against then-prevailing secondary market prices of 35–45 cents, implying a debt reduction of roughly USD 300–400 million in present value terms — a modest outcome relative to the total debt stock.¹¹ Academic reviews of comparable Latin American programs note that effectiveness was constrained by three structural problems that recur, with variations, in Venezuela's contemporary context: (i) exchange rate overvaluation, which made local-currency proceeds less attractive to foreign investors; (ii) investment restrictions that limited sectoral deployment and created bureaucratic rent-seeking opportunities; and (iii) valuation opacity, as conversion rates were set administratively rather than through market mechanisms, generating persistent controversy over haircut allocation.

For the purposes of the contemporary analysis, the 1980s program establishes two important empirical benchmarks. First, Venezuela has institutional memory of debt-equity conversion mechanisms, suggesting that the legal and administrative architecture is not entirely novel — the LOAFSP and the Central Bank's public credit framework are, in part, successors to the regulatory apparatus that governed the 1986–1992 program. Second, the modest scale of debt reduction achieved, despite relatively favorable market conditions compared to the current environment, illustrates that structural program design deficiencies can severely limit effectiveness even when the instrument is theoretically appropriate.

3.2 The 2021 REFIDOMSA Transaction: A Sanctions-Era Precedent

The 2021 REFIDOMSA transaction is the most analytically significant precedent for contemporary Venezuelan debt-equity solutions. PDVSA effectively retired defaulted claims by transferring its 49% stake in Refinería Dominicana de Petróleo, S.A. (REFIDOMSA) through a PATSA Ltd. intermediary to the Dominican State, which assumed responsibility for the outstanding obligations associated with the transferred interest.¹²

Several features of this transaction merit close attention. The stake transferred — 49% of a foreign refining asset — avoided the constitutional constraints on domestic hydrocarbons assets (which require State majority ownership and National Assembly approval for disposition of strategic assets). The transaction was executed through an offshore intermediary, enabling the transfer to occur within OFAC's then-applicable licensing framework. The settlement price has not been publicly disclosed, but contemporary reporting suggests that the Dominican government acquired the stake at a significant discount to book value, consistent with PDVSA's deteriorated financial position.¹³

The REFIDOMSA transaction demonstrates three propositions relevant to this analysis. First, asset-based settlements are operationally executable even within the sanction’s environment, provided they respect applicable legal requirements and work within defined regulatory comfort zones. Second, the asset transferred must be appropriately characterized — neither as a domestic strategic hydrocarbon’s asset requiring National Assembly approval nor as a new primary PDVSA issuance restricted by OFAC general licenses. Third, the discounted settlement value reflects the structural risks that investors must price: illiquidity premium, sanctions-related execution risk, and valuation uncertainty in the absence of market comparable.

4. Venezuelan Legal and Constitutional Framework: Approval Architecture and Constraining Provisions

4.1 Public Credit Framework and the LOAFSP

The Organic Law of the Financial Administration of the Public Sector (LOAFSP) constitutes the primary domestic legal framework governing public debt operations, including conversions and exchanges. Article 80(5) classifies debt conversion among public credit operations, and Article 96 imposes consultation requirements with the Central Bank as a precondition for Republic-level operations. Where a conversion transaction generates "net savings in financing costs" — a criterion that is ambiguous in the context of equity swaps, where the trade-off between current interest expense and future equity dilution does not easily satisfy a cost-comparison test — National Assembly approval under Article 100 may be required.¹⁴

The LOAFSP framework creates material execution risk in two specific scenarios. First, where the Republic is the debtor and where the equity interest being transferred is a direct Republic asset (as opposed to a PDVSA or mixed-company asset), the constitutional and LOAFSP approval requirements are both applicable, requiring a sequential authorization process that could take months or years in the current political environment. Second, where equity interests in State-owned enterprises are transferred to foreign counterparties, an opinion from the Attorney General's Office (Procuraduría General de la República) is mandatory under Article 10 of the Organic Law of the Attorney General's Office, and such opinions are not merely advisory — they constitute a precondition to the validity of the transaction.

4.2 Constitutional Constraints: Articles 150 and 303

Two constitutional provisions impose structural constraints on equity-based debt conversions. Article 150 of the 1999 Constitution subjects contracts of "national public interest" entered into with foreign entities to National Assembly approval and requires that they contain provisions on reservations of sovereignty. The practical application of this provision to debt restructuring transactions is contested in Venezuelan legal doctrine, but the Italiani and Omaña analysis concludes that it likely applies where equity interests in State-owned or State-controlled enterprises are transferred to foreign creditors, regardless of whether the transaction is structured as a debt-equity conversion or an asset sale.¹⁵

Article 303 reserves to the State exclusive ownership and control of PDVSA and its affiliates — a provision whose operational significance has been tested in the context of mixed-company structures (empresas mixtas) authorized under the LOH. The legal consensus, reflected in the academic literature and confirmed by the 2001 and 2006 hydrocarbons sector restructuring experiences, is that Article 303 permits equity participation by private investors in mixed companies where PDVSA retains a controlling interest, but that it does not permit outright transfer of PDVSA's majority stake in any individual company.¹⁶

4.3 The Anti-Blockade Law: Potential Platform and Critical Limitations

The 2020 Ley Constitucional Anti-Bloqueo para el Desarrollo Nacional y la Garantía de los Derechos Humanos (Anti-Blockade Law) has been invoked in practitioner commentary as a potential contracting platform for debt restructuring transactions because it authorizes the executive branch to enter into special contracts with confidentiality protections in sectors subject to sanctions, without complying with the standard transparency and publication requirements of Venezuelan administrative law.¹⁷

This analysis, however, requires significant qualification. Legal scholars have raised serious concerns about the Anti-Blockade Law's opacity and its limited judicial enforceability that the prior literature on Venezuelan restructuring has largely glossed over.¹⁸ The Law's confidentiality provisions, while operationally attractive for sanctioned-environment transactions, create a structural problem: if transaction terms cannot be publicly disclosed, investors cannot conduct standard due diligence, cannot obtain opinions from public attorneys, and cannot verify that the transaction satisfies the constitutional requirements that remain applicable even under the Law's special regime. The academic consensus, consistent with the broader literature on opacity in sovereign debt markets, is that confidentiality-based transaction structures generate a severe information asymmetry premium that significantly increases the cost of capital — in direct contradiction to the transparency-based governance innovations exemplified by Sri Lanka's GLB covenants.

The Anti-Blockade Law's track record as a contracting platform is limited and mixed. Contracts executed under its provisions have not been tested in Venezuelan courts for consistency with the constitutional provisions discussed above, and no publicly available transaction provides a reliable precedent. Academic analyses that treat the Law as a robust contracting platform for equity-based debt settlements should therefore be read with caution.

4.4 The 2026 LOH Reform: Statutory Advances and Residual Gaps

The LOH amendment published in Official Gazette No. 6,978 Extraordinary on January 29, 2026, addresses several of the structural weaknesses in the prior hydrocarbons framework that limited project-level bankability.¹⁹ Three specific provisions are analytically significant for equity-linked debt instruments. First, the expanded authority for mixed companies and qualified operators to market their own production quotas directly — rather than through PDVSA's commercial arm — reduces PDVSA's ability to divert export revenues before they reach ring-fenced collection accounts, which is essential for revenue-linked payment structures. Second, the broadened contractual modalities enabling private Venezuelan companies to participate under direct agreements with state-owned enterprises create additional structural options for creditor participation in project economics. Third, the explicit recognition of international arbitration as a dispute resolution mechanism addresses a significant gap in the prior framework, where the enforceability of arbitration clauses in hydrocarbons contracts with state-owned counterparties was legally uncertain.

However, legal observers have raised legitimate questions about whether these provisions are genuinely new or largely cosmetic — a concern grounded in Venezuela's track record of regulatory reform announcements that are not implemented consistently.²⁰ The arbitration provisions in particular require scrutiny: Venezuela withdrew from ICSID in 2012 and has challenged the jurisdiction of investment tribunals in multiple proceedings. The LOH amendment's recognition of arbitration is a positive statutory signal, but it does not by itself resolve the question of which arbitral rules, which seat, and which enforcement jurisdiction will apply — precisely the details on which contractual bankability depends.

5. The Sanctions Architecture: Structural Analysis of the Binding Constraint

5.1 Beyond the Press Release: Sanctions as a Structural Variable

Prior treatments of OFAC sanctions in the Venezuelan restructuring literature have tended to present licensing developments as sequential updates to a fixed framework — a characterization that misses the structural relationship between sanctions architecture and restructuring feasibility. Sanctions do not merely limit the set of permissible transactions; they determine the fundamental incentive structure of the creditor-debtor relationship by controlling which assets can serve as collateral, which payment channels are available, and which enforcement remedies are accessible.²¹

The analytical framework appropriate for this context is not a chronological summary of OFAC licenses but rather an assessment of three structural dimensions: (i) the durability of the licensing framework, including its susceptibility to revocation in response to political developments; (ii) the differential impact on U.S. versus non-U.S. creditors; and (iii) the interaction between primary and secondary sanctions exposure.

5.2 CITGO and the GL 5 Series: Enforcement Control and Its Implications

The most consequential single element of the sanctions architecture for debt restructuring purposes is not any individual general license authorizing oil trade but rather the GL 5 series, most recently GL 5U, which has repeatedly postponed the effective date of authorizations related to the PDVSA 2020 bond and its pledged CITGO collateral. This licensing structure has effectively transformed CITGO from a straightforward collateral enforcement target into a political instrument, whose disposition is controlled by OFAC's gatekeeping authority rather than by standard creditor remedies.²²

The structural implication for debt-equity swap design is significant. The GL 5U framework demonstrates that OFAC is capable of and willing to supersede contractual creditor rights in the enforcement context. Any swap structure that relies on U.S.-domiciled assets as collateral, payment conduit, or enforcement target must therefore be analyzed not merely for its contractual enforceability but for its OFAC license dependency — including the risk that licenses are modified, revoked, or allowed to expire in response to shifts in U.S.-Venezuela diplomatic or political relations.

5.3 GL 46–49 and the Oil-Trade Licensing Framework: Window or Pathway?

The cluster of OFAC general licenses issued between January 29 and February 13, 2026 — including GL 46A (Venezuelan oil purchase and sale transactions), GL 47 (U.S.-origin diluents), GL 48 (goods and services for upstream operations), and GL 49 (negotiations of contingent contracts for new investment) — collectively create a temporary framework that could support the cash-flow foundations of equity-linked debt instruments.²³

The academic question, however, is whether GL 46–49 constitute a durable pathway or merely a temporary and revocable window contingent on U.S.-Venezuela diplomatic dynamics. This distinction is non-trivial: equity-based debt settlements are long-duration instruments, and investors pricing them must assess not only whether a transaction is permissible on the settlement date but whether the cash-flow mechanics remain licensed over the life of the instrument. The general license framework provides no such durability guarantee; it is administratively revocable and has been modified repeatedly, sometimes with little advance notice.

The Trump administration's sanctions posture — a dimension entirely absents from the prior treatment of this article; despite being written in February 2026 — is directly material to this durability question. The Trump administration's approach to Venezuela sanctions has historically been more restrictive than the Biden administration's, and the policy trajectory between the two administrations reflects genuine uncertainty about whether the current licensing openings will be sustained or reversed.²⁴ This uncertainty should be reflected in the risk pricing of any transaction structured around the current GL framework, and it substantially reduces the attractiveness of long-duration instruments that are dependent on license continuity.

5.4 Secondary Sanctions and Non-U.S. Creditors: The More Binding Constraint

The prior treatment of sanctions in this context focuses almost exclusively on OFAC primary sanctions applicable to U.S. persons. This framing is analytically incomplete, because many of Venezuela's largest creditors — including European banks, Chinese state-owned creditors, and Russian entities — are non-U.S. persons. For these creditors, the operative constraint is not primary sanctions (which do not directly apply) but secondary sanctions exposure: the risk that transactions with Venezuelan state entities will trigger designation under executive orders that extend sanctions consequences to non-U.S. persons who engage in "significant transactions" with targeted parties.²⁵

For European institutional creditors, secondary sanctions exposure creates a material deterrent to participation in any debt restructuring that involves Venezuelan state entities, even where the specific transaction would be permissible under primary sanctions. The legal analysis required to confirm that a particular transaction does not constitute a "significant transaction" with a sanctioned party is both expensive and uncertain, and compliance committees at European banks have demonstrated considerable risk aversion in this context. For Chinese and Russian state creditors, the calculus is different — they face secondary sanctions exposure on different legal bases and have demonstrated a greater tolerance for sanctions-adjacent transactions — but their incentive structures are also different, as discussed in Section 7 below.

6. The 2026 Hydrocarbons Law Reform: Structuring Implications and Limitations

Section 4.4 above analyzed the LOH reform's legal architecture. This section examines its implications for the economic design of equity-linked debt instruments, with particular attention to valuation, fiscal stability, and the practical enforceability of the reform's key provisions.

The reform's revised royalty and tax framework — specifically the introduction of a royalty cap and a new integrated hydrocarbons tax linked to gross revenues — has direct implications for project economics and therefore for the valuation of equity interests in mixed companies. Industry analysts note that the new fiscal regime's parameters will determine the contractual tax and royalty stabilization clauses available to investors, which are, in turn, central to the discounted cash-flow models on which equity valuations depend.²⁶

The reform's direct marketing provisions, if implemented consistently, could significantly improve the economics of equity-linked instruments by enabling ring-fenced collection accounts to capture production revenues before they pass through PDVSA's financial infrastructure. This matters because PDVSA's track record of diverting export revenues — documented in multiple ICSID proceedings and academic analyses of Venezuela's production decline — creates a structural problem for any revenue-linked payment structure that depends on PDVSA's financial integrity.²⁷

However, the reform's implementation track record must be honestly assessed. Venezuela's regulatory history contains numerous precedents of significant statutory reforms that were not implemented consistently or predictably — the 2001 and 2006 LOH amendments are the most analytically relevant examples, both of which generated substantial investor uncertainty about the stability of contractual terms in the hydrocarbons sector. The question of whether the 2026 reform represents a genuine change in regulatory approach or another iteration of this pattern cannot be answered at this early stage, and this uncertainty should be priced into any equity-linked instrument structured around the reform's provisions.

7. Creditor Heterogeneity and the Collective Action Problem

7.1 Disaggregating Venezuela's Creditor Base

A critical analytical weakness in the prior literature on Venezuelan debt restructuring — including the original version of this paper — is the treatment of "creditors" as a monolithic category. Academic analysis requires disaggregation along at least five dimensions: legal form, governing law and enforcement jurisdiction, relationship to the issuer, incentive structure, and veto power over any comprehensive restructuring.

Republic bondholders hold instruments governed by New York law with contractual rights to accelerate and attach sovereign assets. PDVSA bondholders hold separate instruments, some of which (notably the 2020 bonds) are secured by a pledge of PDVSA's shareholding in PDV Holding, Inc. and thus in CITGO — a pledge whose enforceability has been complicated by the GL 5 series. Bilateral creditors, primarily China (approximately USD 17–20 billion in outstanding obligations as of the most recent published estimates) and Russia (estimated USD 3–8 billion), hold claims under bilateral loan agreements that do not have ICSID or New York law governing provisions, and whose enforcement is governed primarily by diplomatic rather than legal channels.²⁸

ICSID arbitration award holders — a category that includes significant claims from Exxon Mobil, ConocoPhillips, and numerous other companies arising from the 2007 nationalizations — hold final awards that are, in principle, enforceable in jurisdictions where Venezuela holds attachable assets, but whose practical enforcement has been complicated by the competing priority claims of bondholders and by the GL 5U framework. Trade creditors and commercial counterparties hold a variety of instruments of different enforceability and seniority.

7.2 The Collective Action Problem: Why Theoretically Available Instruments Have Not Been Deployed

The analytical puzzle at the center of Venezuela's debt situation is not why debt-equity swaps are unavailable, but why they have not been deployed despite being theoretically available since at least 2018. A creditor coordination framework provides a compelling explanation.

The holdout problem in Venezuela is severe. Any individual creditor that accepts equity in a Venezuelan asset surrenders a fixed income claim — with however uncertain enforcement prospects — in exchange for an illiquid, operationally uncertain equity position. The individual creditor's calculus depends on whether it believes that: (i) the equity position will generate recoveries superior to the fixed claim; (ii) a sufficient proportion of other creditors will participate to make the equity instrument viable (since the economic value of participation depends on whether a comprehensive restructuring actually occurs); and (iii) the sanctions architecture will not eliminate the value of the equity position before it can be realised.²⁹

Under current conditions, none of these three beliefs is well-founded, and each is subject to strategic uncertainty that makes coordination extremely difficult. GL 5U, in particular, creates a specific holdout incentive: creditors with claims secured by or related to CITGO have a strong incentive to maintain their existing positions in anticipation of a change in U.S. policy that might permit enforcement, rather than exchanging into uncertain equity. This dynamic — specific to Venezuela and directly created by the sanction’s architecture — is a primary reason why the theoretical availability of equity-based instruments has not translated into actual transactions.³⁰

7.3 Chinese and Russian Creditors: The Bilateral Constraint

China and Russia's bilateral claims deserve separate attention because their incentive structures differ fundamentally from those of bonded creditors. Chinese state creditors — primarily CDB and Exim Bank — have historically been repaid through oil-for-loan arrangements that effectively constitute a variant of the revenue-linked debt instruments discussed in this paper: Venezuela's export revenues have been partially ear-marked for Chinese debt service, with the quantum of deliveries adjusted for oil price fluctuations.³¹

This existing structure means that China already has a de facto equity-like exposure to Venezuelan oil production, and its incentive in any formal restructuring process is to maintain or improve the seniority and certainty of this arrangement rather than to participate in a generalized equity swap program. Russia's Rosneft has similarly structured its claims partly through pre-payment arrangements. The implication is that any comprehensive debt-equity swap program that does not address these bilateral arrangements as a first-order constraint is unlikely to achieve the creditor participation rates necessary for a meaningful restructuring — a dimension of the problem that the existing literature has not adequately addressed.

8. Comparative Lessons: Ecuador, Argentina, Zambia, Ghana, and Sri Lanka

8.1 Ecuador’s 2008 Selective Default and Buyback

Ecuador's 2008 restructuring — a deliberate selective default on bonds characterized by President Correa as "illegitimate" followed by a reverse-auction buyback at prices of approximately 35 cents on the dollar — is the most analytically instructive comparator for Venezuela's potential unilateral approaches. The Ecuador experience demonstrates that a government with a clear restructuring strategy and willingness to accept reputational costs can achieve substantial debt reduction (Ecuador retired approximately 70% of the targeted bonds) in a relatively compressed timeframe.³²

However, Ecuador's approach is not directly replicable in Venezuela's case for two reasons. First, Ecuador retained access to international capital markets throughout the process, whereas Venezuela's sanctions environment makes new market access dependent on separate OFAC authorizations. Second, Ecuador's selective default was directed at a specific class of bonds; Venezuela's default is comprehensive, covering Republic and PDVSA bonds as well as bilateral and commercial claims, making a selective approach more legally and diplomatically complex.

8.2 Argentina’s 2005 and 2020 Restructurings: The Holdout Problem

Argentina's experience across its 2001 default and the subsequent 2005 and 2010 exchange offers — and the holdout litigation that culminated in the 2014–2016 NML v. Argentina proceedings — is the most extensively documented case study in the sovereign holdout literature. The NML litigation demonstrated that holdout creditors in New York law bonds can extract significant value through enforcement actions even against a sovereign, and that the resulting disruption to market access can impose substantial costs on exchange participants.³³

The Argentine precedent has two direct implications for Venezuela. First, New York law PDVSA and Republic bonds contain collective action clauses (CACs) that, if properly invoked with sufficient participation, can bind holdouts — but the threshold requirements and inter-series aggregation mechanics require careful analysis for each bond series outstanding. Second, Argentina's 2020 restructuring, which successfully exchanged approximately USD 65 billion in bonds with high participation rates, provides a procedural template that could be adapted for Venezuela, including the use of exit consents and enhanced CAC provisions to manage the holdout problem.

8.3 Zambia, Ghana, and the Common Framework: Recent African Precedents

Zambia and Ghana's recent debt restructurings under the G20 Common Framework provide the most contemporaneous comparators for Venezuela's situation, though the institutional context differs significantly. Both countries relied heavily on state-contingent instruments: Zambia's zero-coupon convertible bond (which converts to a coupon-paying instrument if GDP outperforms IMF forecasts) and Ghana's restructuring, which included similar GDP-contingent elements, represent the frontier of SCDI design in post-2020 sovereign restructurings.³⁴

The Common Framework comparators highlight a constraint directly applicable to Venezuela: both Zambia and Ghana achieved restructuring agreements partly because they had active IMF programs that provided an independent, credible assessment of repayment capacity. Venezuela lacks an IMF program, and the prospects for engaging one in the near term are limited by both political factors and the sanctions environment. This absence of an IMF anchor — which performs the analytical function of providing a baseline for debt sustainability assessment — means that any Venezuelan restructuring must engineer a substitute credibility mechanism, whether through independent auditors, binding transparency covenants of the Sri Lanka GLB type, or another contractual innovation.

8.4 Sri Lanka's 2024 Contractual Innovation: The Information Covenant Model

Sri Lanka's 2024 debt restructuring, which exchanged USD 12.55 billion in bonds with 98% creditor participation, is the most analytically sophisticated recent precedent for the contractual design dimension of Venezuela's restructuring problem.³⁵ Three specific innovations are directly relevant.

First, the Governance-Linked Bonds (GLBs) embedded information disclosure covenants as legally binding obligations rather than mere best-effort commitments. Non-compliance with specified publication requirements — annual economic review, Ministry of Finance annual report, semi-annual debt reports, and investor calls — constitutes a technical default, not merely a penalty rate adjustment. This structure directly addresses Venezuela's data reliability problem by using bond legal architecture to create enforceable transparency obligations.³⁶

Second, the GLB structure created a direct economic incentive for the issuer to comply with governance KPIs through a coupon step-down mechanism: if Sri Lanka meets its IMF revenue-to-GDP targets and publishes required fiscal strategy statements, the coupon on the GLBs is reduced by 75 basis points. This aligns the issuer's financial incentive with transparency compliance — a feature that is replicable in Venezuelan equity-linked instruments through parallel mechanisms such as royalty adjustments, production-sharing ratio modifications, or interest rate step-downs tied to audited production data publication.

Third, the Most Favored Creditor Clause in the Sri Lanka exchange protects participating creditors against the risk of a subsequent, more favorable offer to other creditors — a mechanism that directly addresses the holdout problem by reducing the expected value of strategic non-participation. A comparable mechanism in a Venezuelan context could significantly improve participation rates in any voluntary exchange.

9. The Threshold Conditions for Viable Swap Execution

Drawing on the theoretical framework, the comparative analysis, and the Venezuelan legal and sanctions landscape, this section identifies the four threshold conditions that must be satisfied before debt-to-equity swaps can function as a viable, scalable restructuring instrument for Venezuela. Each condition is necessary but not individually sufficient; the four conditions interact, and failure on any one of them is likely to undermine the viability of the others.

Condition 1: Statutory Title and Constitutional Authorization

The first threshold condition is the existence of a credible statutory basis for the equity transfer that satisfies Venezuelan constitutional and public credit law requirements without creating material legal uncertainty. This requires either: (i) the enactment of specific enabling legislation that provides clear authorization for equity-linked debt conversions in the hydrocarbons sector, subject to defined approval thresholds; or (ii) a transaction structure that avoids the constitutional provisions discussed in Section 4 by operating below the level of mixed-company equity transfers that implicate Article 303 and that do not require National Assembly approval under Article 150.

Condition 2: Durable Sanctions-Compliant Payment Architecture

The second threshold condition is the existence of a durable, legally verified payment architecture that: (i) is supported by specific OFAC licenses (not merely general licenses subject to administrative revocation); (ii) provides compliant payment channels for both U.S. and non-U.S. participants; and (iii) is designed to remain viable across plausible scenarios of U.S. policy change. The GL 46–49 framework as it stands does not satisfy this condition, because it provides general rather than specific licenses and is subject to the diplomatic and political uncertainties discussed in Section 5. The specific license pathway — involving targeted OFAC authorization for a defined transaction structure — provides greater legal certainty but requires extended regulatory engagement.

Condition 3: Enforceable Governance and Information Covenants

The third threshold condition, informed directly by the Sri Lanka GLB model and the IMF's SCDI literature, is the embedding of enforceable governance and information covenants in the instrument's legal architecture. For Venezuelan equity instruments, these covenants must address: (i) audited production and revenue data publication obligations, with non-compliance constituting an event of default; (ii) independent verification of key performance indicators; (iii) ring-fenced collection account mechanics with specified waterfall provisions; and (iv) investor call requirements that create periodic opportunities for creditor monitoring and early warning of compliance failures.

Condition 4: A Mechanism to Overcome Collective Action Obstacles

The fourth and most politically difficult threshold condition is the existence of a mechanism to overcome the holdout problem and achieve sufficient creditor participation to make the exchange viable. Several legal instruments are available to contribute to this objective: enhanced CAC provisions requiring lower threshold participation for binding of holdouts; exit consents that modify the terms of non-participating bonds in ways that reduce their value; a Most Favored Creditor Clause modelled on the Sri Lanka structure; and, potentially, a coordinated U.S. government communication (distinct from an OFAC license) that signals the long-term sanctions direction in a way that reduces the option value of holding out in anticipation of more favorable future enforcement conditions.

10. Conclusion

This paper has argued that debt-to-equity swaps are structurally superior instruments for Venezuela's restructuring relative to rescheduling or haircut-only approaches, but that their structural superiority is presently unrealized because four identifiable threshold conditions remain unsatisfied. The 2026 LOH reform advances one of these conditions — the statutory basis for project-level commercialization — but leaves three others substantially unresolved: durable sanctions-compliant payment architecture, enforceable governance covenants, and a mechanism to overcome the holdout problem.

The paper's theoretical contribution is to integrate sovereign debt creditor coordination theory with the SCDI literature, and the contractual innovation tradition exemplified by Sri Lanka's GLBs into a unified framework that identifies the precise preconditions for equity-based debt settlement in a sanctioned, institutionally complex environment. The framework has testable implications: if the four threshold conditions are satisfied, equity-based instruments should achieve higher creditor participation rates and larger absolute debt reduction than rescheduling alternatives; if they are not, equity instruments will remain theoretical possibilities without practical traction — as they have since 2018.

The comparative analysis draws two cautionary lessons from the historical record. First, structurally sound instruments do not automatically produce successful outcomes: Venezuela's 1980s conversion program achieved modest debt reduction despite operating in a more favorable environment than today's. Second, the holdout problem is the most binding practical constraint: Argentina's post-2014 litigation experience and the divergent incentive structures of Venezuelan bilateral creditors both suggest that any program that does not address collective action at the design stage will fail to achieve the participation rates required for effectiveness.

The Sri Lanka GLB model offers the most directly applicable contractual innovation for Venezuelan equity instruments: the use of legally binding information disclosure covenants, economic incentives for compliance, and creditor protection clauses that reduce the expected value of strategic non-participation. Adapting this model to the Venezuelan context — with appropriate modifications for the hydrocarbons sector focus and the sanctions environment — is the most promising immediate contribution that legal scholarship can make to Venezuela's eventual restructuring.

The conclusion is not optimistic about the near-term prospects for large-scale equity-based debt conversion in Venezuela. The political economy obstacles are severe, the sanctions environment is uncertain, and the institutional preconditions for credible transaction execution are not currently in place. But the analysis does identify a sequenced pathway: statutory enabling legislation, targeted OFAC specific license engagement, contractual architecture incorporating Sri Lanka-type governance covenants, and a creditor coordination mechanism that reduces holdout incentives. This pathway is long and uncertain, but it is more rigorously grounded in the legal and economic realities of Venezuela's situation than the advocacy-driven treatments that currently dominate the practitioner literature.

ABOUT THE AUTHOR

Juan Carlos Andrade Santamaria is partner at LEC Abogados and Director and Founder of the Araya Energy Group and a Visiting Professor at the Centre for Commercial Law Studies, Queen Mary University of London. He served as Principal Director and Legal Advisor of the Venezuelan Chamber of Petroleum (2022–2024), Senior Director of Petroregional del Lago (a Shell/PDVSA Joint Venture, 2008–2012), Vice President of Legal and Government Relations at Shell Venezuela (2005–2012), and Partner at Baker McKenzie Caracas (2000–2005). He was an active member of the Association of International Petroleum Negotiators (AIPN) for more than fifteen years.

References and Notes

¹ Kargman, S. (2020). Venezuela's Potential Debt Restructuring and Economic Recovery Efforts. Revista Venezolana de Legislación y Jurisprudencia, No. 13, pp. 163–190; Moatti, T., & Muci, F. (2019). An Economic Framework for Venezuela's Debt Restructuring. Harvard Kennedy School, SYPA.

² IMF and Global Sovereign Debt Roundtable. (2025). Sovereign Debt Restructuring: A Playbook for Country Authorities (Version April 23, 2025). https://www.imf.org/-/media/files/about/faq/gsdr/042325-gsdr-restructuring-playbook.pdf

³ Bolton, P., & Skeel, D. (2004). Inside the Black Box: How Should a Sovereign Bankruptcy Framework Be Structured? Emory Law Journal, 53(4), 763–822.

⁴ Buchheit, L., & Gulati, G.M. (2017). Restructuring Sovereign Debt after NML v. Argentina. Capital Markets Law Journal, 12(2), 224–238; Olivares-Caminal, R. (2009). Legal Aspects of Sovereign Debt Restructuring. Sweet & Maxwell.

⁵ International Monetary Fund. (2017). State-Contingent Debt Instruments for Sovereigns. Policy Paper, May 22, 2017. https://www.imf.org/en/Publications/Policy-Papers/Issues/2017/05/19/pp032317state-contingent-debt-instruments-for-sovereigns

⁶ Borensztein, E., & Mauro, P. (2004). The Case for GDP-Indexed Bonds. Economic Policy, 19(38), 165–216; Kamstra, M.J., & Shiller, R.J. (2009). The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation. Cowles Foundation Discussion Paper No. 1717.

⁷ VoxEU/CEPR. (2025). State-contingent debt instruments for sovereigns: A balanced view. https://cepr.org/voxeu/columns/state-contingent-debt-instruments-sovereigns-balanced-view

⁸ Olivares-Caminal, R., & Bustillo, R. (2025). Sri Lanka's Contractual Innovations. Butterworths Law Review [46-4] BULA, 96–101.

⁹ African Legal Support Facility. (2020). State-Contingent Debt Instruments: Debt Guide. https://www.alsf.int/public/publication/XTq25GyU_STATE CONTINGENT DEBT INSTRUMENTS DEBT GUIDE.pdf

¹⁰ International Monetary Fund. (1988). An Explanation and Assessment of Debt-Equity Swaps in Latin America. IMF Working Paper 25(2). https://www.elibrary.imf.org/view/journals/022/0025/002/article-A005-en.xml; Larraín, F., & Velasco, A. (1990). Can Swaps Solve the Debt Crisis? Princeton Studies in International Finance, No. 69.

¹¹ Kargman, S. (2020). Venezuela's Potential Debt Restructuring. Revista Venezolana de Legislación y Jurisprudencia, No. 13, pp. 175–176; comparative data drawn from IMF WP (1988) and Larraín & Velasco (1990).

¹² Reuters. (2021, August 19). Venezuela's PDVSA cedes stake in Dominican oil refinery in debt swap. https://www.reuters.com/business/venezuelas-pdvsa-cedes-stake-dominican-oil-refinery-debt-swap-2021-08-19/; Venezuelan Ministry of Economy and Finance (MPPEF). (2021, August 19). Comunicado: Culmina con éxito negociación entre PDVSA y PATSA LTD.

¹³ Italiani, F., & Omaña, C. (2021). Debt-equity Conversions in Venezuela. Global Restructuring Review: Americas Restructuring Review (2021 edition).

¹⁴ Organic Law of the Financial Administration of the Public Sector (LOAFSP). Articles 80(5), 96, and 100; Kargman, S. (2020). pp. 170–172.

¹⁵ Venezuelan Constitution (1999). Article 150; Italiani, F., & Omaña, C. (2021). Debt-equity Conversions in Venezuela.

¹⁶ Venezuelan Constitution (1999). Article 303; Revista Venezolana de Legislación y Jurisprudencia, No. 22 (2024). New petroleum contracts under the Anti-Blockade Law.

¹⁷ Kargman, S. (2020). pp. 176–177; Revista Venezolana de Legislación y Jurisprudencia, No. 22 (2024).

¹⁸ See scholarly commentary on the Anti-Blockade Law's opacity and enforceability limits; Olivares-Caminal & Mustapha, Improving Transparency of Lending to Sovereign Governments, ODI Working Paper (2020).

¹⁹ KPMG. (2026, February 3). Venezuela: Amended hydrocarbons law introduces new tax framework; King & Spalding. (2026, February). Venezuela reforms hydrocarbons law: A potential sea change for foreign investment; Mayer Brown. (2026, February 4). Venezuela transforms hydrocarbons sector with new hydrocarbons law amendment.

²⁰ King & Spalding. (2026, February). Venezuela reforms hydrocarbons law, pp. 3–4; academic and practitioner commentary on implementation risk in Venezuelan regulatory reform.

²¹ Davis Polk. (2026, February). Venezuela Sanctions Update; Office of Foreign Assets Control (U.S. Treasury). Venezuela-related FAQs and General Licenses (2023–2026).

²² OFAC. (2026, February 2). FAQ 595: General License 5U; Reuters. (2026, February 2). U.S. extends protection of Venezuela-owned Citgo from creditors.

²³ Davis Polk. (2026, February). Venezuela Sanctions Update; OFAC FAQs 661, 662 (GLs 3I and 9H, 2023).

²⁴ Analysis of Trump administration Venezuela sanctions posture based on public OFAC actions and policy statements, January–February 2026.

²⁵ Moatti, T., & Muci, F. (2019). An Economic Framework for Venezuela's Debt Restructuring, pp. 45–48; OFAC. (2023). FAQ 1136: Venezuela-related transactions.

²⁶ KPMG. (2026, February 3). Venezuela: Amended hydrocarbons law, pp. 2–3; Mayer Brown. (2026, February 4). Venezuela transforms hydrocarbons sector, pp. 2–3.

²⁷ King & Spalding. (2026, February). Venezuela reforms hydrocarbons law, p. 4; academic analyses of PDVSA revenue diversion and production decline.

²⁸ Kargman, S. (2021). Venezuela's Debt Crisis and Restructuring Options. AIRA Journal, May 2021; Reinhart, C., & Trebesch, C. (2016). Sovereign Debt Relief and Its Aftermath. Journal of the European Economic Association, 14(1), 215–251.

²⁹ Bolton, P., & Skeel, D. (2004). Inside the Black Box; Buchheit & Gulati (2017).

³⁰ OFAC. (2026, February 2). FAQ 595: GL 5U; analysis of holdout incentives under the current licensing framework.

³¹ Moatti, T., & Muci, F. (2019). An Economic Framework for Venezuela's Debt Restructuring, pp. 52–55; academic analyses of Chinese oil-for-loan arrangements with Venezuela.

³² Buchheit, L., Gulati, G.M., & Thompson, R. (2007). The Dilemma of Odious Debts. Duke Law Journal, 56, 1201; academic analyses of Ecuador's 2008 restructuring process.

³³ NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012); Buchheit & Gulati (2017); IMF. (2025). Restructuring Sovereign Domestic Debt in Developing Economies. IMF Working Paper.

³⁴ Maret, T. (2024). Zambia: Third Time's a Charm? Sovereign Debt Oddities (April 2, 2024); Olivares-Caminal, R., & Bustillo, R. (2025). Sri Lanka's Contractual Innovations, pp. 97–98.

³⁵ Olivares-Caminal, R., & Bustillo, R. (2025). Sri Lanka's Contractual Innovations. Butterworths Law Review [46-4] BULA, 96–101; Government of the Democratic Socialist Republic of Sri Lanka. (2024). Announcement of Final Results of Invitation. London Stock Exchange.

³⁶ Olivares-Caminal, R., & Bustillo, R. (2025). Sri Lanka's Contractual Innovations, pp. 98–100; Government of Sri Lanka GLB Indenture, Annex II (KPI Certificate and Step-Down Margin provisions).