Frequently Asked Legal Questions on Venezuela s and PDVSA s bonds, with a reference to promissory notes issued by PDVSA

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1 Frequently Asked Legal Questions on Venezuela s and PDVSA s bonds, with a reference to promissory notes issued by PDVSA by D Empaire (Carlos Omaña) Are PDVSA s bonds guaranteed by Venezuela? No. The bonds issued by Petróleos de Venezuela, S.A. ( PDVSA ) are not guaranteed by the Bolivarian Republic of Venezuela (the Republic ). This means that if PDVSA fails to pay interest or principal on its bonds investors do not have recourse against the Republic. Do PDVSA s bonds cross-accelerate Venezuela s bonds? Vice-versa? No. A default by PDVSA on its bonds will not trigger a default of (or a right to accelerate) Venezuela s bonds. Likewise, a default by Venezuela will not trigger a default of (or a right to accelerate) PDVSA s bonds. Does the Republic s internal financial debt cross accelerate its foreign external indebtedness? No. To accelerate Venezuela s foreign external indebtedness, the debt that Venezuela fails to pay (or otherwise defaults and is accelerated by the bondholders) needs to be (i) denominated in a foreign currency (i.e., not denominated in bolívares) and (ii) of the type regularly issued in capital markets (e.g., notes, bonds, floating rate notes or other types of securities). Venezuela s internal financial debt is mostly denominated in bolívares. Therefore, if the Republic fails to pay the principal or interest due on internal debt bonds, such a default will not cross-accelerate its external debt bonds. Venezuela has issued some internal debt bonds the capital of which is adjustable to the official foreign exchange rate (i.e., Títulos de Interés y Capital Cubierto), however, bonds are denominated in bolívares and are not tradeable in the international capital markets and they are cleared through Venezuelan Central Bank ( Banco Central ). In other words they are indexed to the official foreign exchange rate but are payable in bolívares. Does a default by the Republic on indebtedness due to international banks or multilateral institutions cross-accelerate Venezuela s bonds? The failure by the Republic to pay indebtedness due under credit agreements will not give the right to the holders of Venezuela s bonds to accelerate their bonds. As explained

2 above, the Republic s cross-acceleration provision is triggered by the acceleration by bondholders of securities that are denominated in a foreign currency, and of the type regularly issued in the capital markets such as notes, bonds, floating rate notes or other types of securities. Are PDVSA Bonds and Venezuela Bonds the same? PDVSA is a separate legal entity from the Republic and each of them have their own legal personality and credit rating. PDVSA is organized in Venezuela as a sociedad anónima under the Venezuelan Commercial Code and 100% of its shares are owned by the Republic. PDVSA indirectly through its subsidiaries owns assets in Venezuela as well as other countries such as the U.S. and Sweden. PDVSA is a holding company which means that it only holds shares in its operating subsidiaries and other subsidiaries. PDVSA s bonds are guaranteed by PDVSA Petróleo, S.A., also a separate legal entity from PDVSA, which owns most of the group s oil and gas assets in Venezuela, except for the oil and gas assets that are owned by Empresas Mixtas which are joint ventures with private investors in which PDVSA, through Corporación Venezolana del Petróleo, S.A. owns at least more than 50% of their capital (60% for Empresas Mixtas located in the Orinoco Belt). PDVSA owns 100% of PDV Holding, Inc., who in turn owns100% of the shares of Citgo Holding, Inc., who owns 100% of the shares of Citgo Petroleum Corporation (all Delaware companies). Citgo Petroleum Corporation owns the refining and pipeline assets in the U.S. known as Citgo. 50.1% shares of Citgo Holding, Inc. are pledged to secure PDVSA s 8.5 % senior secured notes due in Certain creditors of the Republic that hold arbitration awards rendered against Venezuela have argued in litigation in the U.S. that PDVSA is an alter ego of the Republic, in other words that they are the same thing. In addition, in August 2017, a Canadian mining company called Crystallex filed a proceeding in Delaware seeking to execute on PDVSA s 100% shareholding interest in PDV Holding, Inc. arguing that PDVSA is the alter ego of the Republic. Crystallex (which reportedly settled its claim with the Republic in November of 2017) has also argued that the security interest granted by PDVSA to secure its 8.5% bonds due in 2020 was the result of a fraudulent conveyance. More specifically, in addition to the alter ego claim, Crystallex filed lawsuits under the Delaware Uniform Fraudulent Transfer Act (DUFTA) seeking to collect from PDVSA arguing that PDVSA s assets could be used to satisfy a judgment against the Republic because Citgo Holding issued $2.8 billion in debt and fraudulently used the proceeds from that debt to pay a $2.8 billion dividend up to PDVSA (which is an arm of the Republic ) which were then transferred out of the United States.

3 In addition, Crystallex again sued PDV Holding in Delaware under DUFTA after PDVSA issued secured bonds as part of an exchange offer for its bonds due in The new bonds, the PDVSA 2020s are secured by 50.1% of PDV Holding s interest in CITGO Holdings. On January 3, 2018, the U.S. Court of Appeals for the Third Circuit decided that PDVSA, which is a non-debtor transferor may not be sued in Delaware under DUFTA 1, essentially rejecting Crystallex s DUFTA claims. This decision is under appeal as of the date of this writing 2. Who owns Venezuela s oil? Venezuela owns all hydrocarbons while they are underground at the reservoir. Title to hydrocarbons passes to the holder of a concession or license (i.e., PDVSA, PDVSA Petróleo, S.A., CVP or an Empresa Mixta) at the wellhead, pursuant to the terms of the corresponding license. In exchange for the oil, the holder of the license pays a royalty to the Republic, through the Ministry of Petroleum, which can be paid in cash or in kind (i.e., with oil). Primary oil activities, including oil exploration, production and initial transportation and storage are reserved to the Republic who has the right to undertake those activities directly or through government-owned entities in which the Republic owns more than 50% or 60% for certain extra-heavy oil projects located in the Orinoco belt. From a strictly legal perspective, the Republic has the power to create a new entity and grant to that entity all or part of the oil and gas licenses that are currently held by PDVSA and its operating subsidiaries. As noted below, PDVSA and the Republic have chosen to have their international bonds governed by New York law. An interesting issue would be if the creation of a new PDVSA onto which all (or a substantial portion) of PDVSA s assets are transferred, including the right to carry-out primary oil activities and undertake the international sale of crude and derivatives, would be considered as liable for PDVSA s bonds under successor liability. Who holds Venezuela s international reserves? Banco Central holds and manages Venezuela s foreign reserves, including monetary and non-monetary gold, which are reflected in Banco Central s balance sheet. Banco Central is Venezuela s central bank and is in charge of money printing in Venezuela. Banco Central is a separate legal entity from the Republic and from PDVSA, and is generally protected by the same set of immunities that protect the Republic under Venezuelan law, namely immunity 1 Cooper, Richard and Morag, Boaz S., Third Circuit Dismisses Crystallex's Fraudulent Transfer Claim but Potential Liability Remains for PDVSA (January 5, 2018). Available at SSRN: 2 Interestingly, the dividend was paid to PDVSA who allegedly used the proceeds from the dividend to service its debt. So the funds were ultimately transferred to Crystallex s debtor which is the Republic. The funds were not transferred out-of-the-debtor but to-the-debtor.

4 from pre-judgment attachments and attachments in aid of execution of judgments. Banco Central is protected under the U.S Foreign Sovereign Immunities Act and similar sovereign immunities laws in effect in other jurisdictions. Are Venezuela s bonds tax exempt in Venezuela? Yes. Interest paid by Venezuela and capital gains realized from the sale of Venezuela s bonds are not subject to income tax in Venezuela and are not subject to tax withholdings in Venezuela. Are PDVSA s bonds tax exempt in Venezuela? Some are, but some aren t. The attached chart explains the tax treatment in Venezuela of PDVSA s bonds. Which law governs Venezuela s international bonds? New York law. Venezuela has also submitted to the exclusive jurisdiction of courts in New York, London and Caracas. Which law governs PDVSA s international bonds? Most of them are governed by New York law and are issued under a standard New York law indenture and standard terms and conditions for international sovereign emerging market bonds issued under Regulation S and Rule 144A. PDVSA has submitted to the non-exclusive jurisdiction of courts in New York. Do Venezuela s Bonds have CACs? Yes, practically all of Venezuela s outstanding bonds have collective action clauses. This means that a supermajority of bondholders may agree to amend a bond s key payment terms, such as maturity date, principal amount and interest rate. Annex A is an overview of Venezuela s CACs. Venezuelan CACs operate on a bond-by-bond basis, they do not permit the aggregation of several series of bonds. Do PDVSA s Bonds have CACs? No, they don t have collective action clauses and are typically governed by a classic New York law indenture pursuant to which the approval of each bondholder is required to amend key payments terms. What is the payment default threshold for Venezuela s cross-acceleration?

5 US$ 1.00 of public external indebtedness (i.e., securities denominated in a foreign currency and if the type issued in international capital markets such as notes, bonds and floating rate notes), which is accelerated by the holder (it s a cross acceleration clause, not a cross default clause). What is the payment default for PDVSA s cross-default? USD100 million of financial debt by PDVSA or a Significant Subsidiary as such term is defined in Rule 1-02 of Regulation S-X promulgated by the SEC. In which currency are Venezuela s and PDVSA s international bonds denominated? In U.S. dollars. Do Venezuela s Bonds have a Negative Pledge clause? Yes. Specifically, Liens on oil or oil accounts receivable (other than permitted liens) created by Venezuela to secure public financial debt, granted by Banco Central or any governmental agency (a definition that includes PDVSA and its subsidiaries) within certain thresholds measured taking into account Venezuela s operating reserves, will cause Venezuela to equally and ratably secure its outstanding bonds. In general, Venezuela is currently legally barred under Venezuelan law from granting security interests to secure debt and guarantees to secure the debts of other entities. Do PDVSA s Bonds have a Negative Pledge? PDVSA s bonds include a negative pledge provision, under which PDVSA is barred from creating liens (other than permitted liens) over its property or assets (or those of its subsidiaries), unless it s unsecured bonds are equally and ratably secured by any such lien. Permitted liens include liens to secure indebtedness equivalent to 15% of PDVSA s total consolidated assets as well as certain vendor finance, purchase money security interests and security interests in connection with certain project financings. Which are Venezuela s Events of Default? Standard events of default including (i) failure to make payments of principal or interest (in both cases with a 30-day grace period), (ii) acceleration of external financial debt, (iii) final, non-appealable judgments against Venezuela in excess of US$100 million, and (iv) declaration by Venezuela of a moratorium or a repudiation on public financial indebtedness. When an event of default occurs 25% of the holders of the bonds, have the right declare the bonds immediately due and payable, and 50% of the holders have the right to waive any such event of default. Bonds held by the Republic are disenfranchised and may consequently not form a quorum or vote at any bondholders meetings. Which are PDVSA s Events of Default?

6 Standard events of default including (i) failure to make payments of principal (no grace period) or interest (30-day grace period) on the bonds, (ii) default on payment on any indebtedness when due or acceleration of payment of any indebtedness in excess of US$100 million, (iii) final, non-appealable judgments in excess of US$100 million, (iv) insolvency, liquidation or bankruptcy of PDVSA or its subsidiaries, and (v) sale of a substantial portion of its assets. If an event of default occurs the holders of 25% of the notes may declare the bonds immediately due and payable; unless (iv) above (insolvency, liquidation or bankruptcy) occurs, in which case default will be automatic. 50% or more of the holders have the right to rescind, annul or waive any such event of default, except for a payment default and insolvency default. Bonds held by PDVSA or any of its subsidiaries are also disenfranchised, they may not form a quorum or vote at bondholder meetings. However, other government owned entities, such as government-owned banks and Banco Central are not PDVSA subsidiaries. Comments on PDVSA s Promissory Notes For several years and until recently, PDVSA made payments of trade accounts receivable to certain key suppliers by delivering U.S. dollar-denominated promissory notes (the Promissory Notes ) which are governed by New York law and under which PDVSA and PDVSA Petróleo, S.A (as guarantor) have submitted to the exclusive jurisdiction of courts in New York. The Promissory Notes: (i) (ii) (iii) (iv) (v) (vi) (vii) Are issued by PDVSA and guaranteed by PDVSA Petróleo, S.A. have been issued under professionally made note agreements, are issued under an administrative agent structure. The administrative agent being the key suppliers that originally received the Promissory Notes in exchange of their respective accounts receivable. are physical securities, contain terms of conditions that are, in relevant part, very similar to the terms and conditions of PDVSA s bonds. I fact, the events of default and covenants of the Promissory Notes are very similar to those set forth in PDVSA s bonds. In general, PDVSA s and PDVSA Petróleo s obligations under the Promissory Notes are unsecured and rank pari passu with all other present and future unsecured and unsubordinated debts of PDVSA and PDVSA Petróleo, and are junior to PDVSA s and PDVSA Petróleo s secured debt with respect to the secured amount and the value if the encumbered asset, and junior to PDVSA s and PDVSA Petróleo s other obligations that have a legal preference, such as tax obligations and certain labor benefits. PDVSA s and PDVSA Petróleo s debts are structurally subordinated to the obligations of their other subsidiaries, and may also be practically subordinated to transactions in which PDVSA and PDVSA Petróleo have participated that

7 Cross-default involve the prepayment of the purchase price for oil and derivatives sold by PDVSA. If the Promissory Notes have an aggregate principal amount of US$100 million or more, then a payment default by PDVSA (or their acceleration by the original holder or its assignee) could trigger a cross-acceleration default under PDVSA s New York law-governed bonds (provided that the Promissory Notes qualify as Indebtedness). 3 Investors should confirm with New York counsel if the Promissory Notes qualify as Indebtedness, as such term is defined in PDVSA s New York law-governed bonds, a term that is defined in the Indentures relating to such bonds as including money raised or money borrowed. The following is the definition of Indebtedness of PDVSA s New York law-governed bonds: any obligation (whether present or future, actual or contingent, and including without limitation, any Guarantee) for the payment or repayment of money which has been borrowed or raised. * * * Caracas, January 2018 Please consider this as general guidance; it is not intended to be legal or investment advice. Carlos Omaña D'Empaire January The following is the cross-default provision of PDVSA s New York law bonds: (4) the failure to pay at final stated maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Issuer or any of its Significant Subsidiaries, or the acceleration of the final stated maturity of any such Indebtedness (which acceleration is not rescinded, annulled or otherwise cured within 30 days from the date of acceleration) if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final stated maturity or which has been accelerated (in each case with respect to which the 30- day period described above has elapsed), aggregates U.S. $100 million or more at any time.

8 Venezuela s CACs Issue date Maturity Aggregate principal amount Coupon Approval threshold November U.S.$ 1,000,000, % 85% January U.S.$ 1,000,000, % December U.S.$ 500,000, (Reopening) April U.S.$ 1,599,817, % November 2007 April 2008 April 2008 October 2009 October 2009 August 2010 August 2011 October U.S.$ 1,250,000,000 U.S.$ 2,000,000,000 U.S.$ 2,000,000,000 U.S.$ 2,496,000,000 U.S.$ 2,496,000,000 U.S.$ 3,000,000,000 U.S.$ 4,200,000,000 U.S.$ 3,000,000, % 9.0% 9.25% % % 11. December U.S.$ 5,000,000, % The Venezuelan bonds that do not have CACs are: Issue date Maturity Aggregate principal amount Coupon September 1997 August 1998 September US$4,000,000,000 U.S.$ 752,000,000 U.S.$ 300,000, % % %

9 Tax treatment under Venezuelan law of Outstanding PDVSA Bonds Bond (Maturity and Type) 2021 Regulation S /144A Bonds 2022 Regulation S /144A Bonds Tax treatment No exemption from Venezuelan income tax has been found, may be pending. No exemption from Venezuelan income tax has been found, may be pending Regulation S Bonds Both capital gains and interest exempted from Venezuelan income tax. Exemption expires in April 2012, unless renewed Regulation S /144A Bonds No exemption from Venezuelan income tax has been found, may be pending Regulation S /144A Bonds No exemption from Venezuelan income tax has been found, may be pending Regulation S Bonds Both capital gains and interest exempted from Venezuelan income tax. Exemption expires in April 2012, unless renewed. Countries with Double Taxation Treaties in force with Venezuela United States of America, Germany, Austria, Barbados, Belarus, Belgium, Brazil, Canada, China, Korea, Cuba, Denmark, Spain, France, Netherlands, Indonesia, Iran, Italy, Kuwait, Malaysia, Norway, Portugal, Qatar, Czech Republic, Russia, Sweden, Switzerland, Trinidad & Tobago, the United Kingdom, United Arab Emirates and Vietnam.