(Bloomberg) -- Bonds from state-owned Petroleos de Venezuela SA collapsed after New York State’s top court ruled Venezuelan law will determine whether the debt is valid.

The 2020 notes extended losses Wednesday, adding to a 17-cent drop over the past two days, according to traders who asked for anonymity as they are not authorized to speak about the securities. They are trading around 72 cents on the dollar. 

The decision on Tuesday throws into question the validity of bonds that, until recently, were seen by investors as a sure thing. Even though they have been in default for years, the notes are backed by the holding company of US-based refiner Citgo Holding Inc. Bondholders were counting on the sale of Citgo assets to pay the claims at or near par. 

Now, the outlook for that trade has turned murky. An ad hoc PDVSA board of Venezuelan opposition politicians has said the debt isn’t valid because it was never approved by the country’s National Assembly. PDVSA is headquartered in Caracas, but the US doesn’t recognize the government there, meaning the ad hoc board controls the company’s assets in the US, including Citgo. 

“The duration of this legal process is uncertain, and its impact on the Citgo auction remains unclear,” Ricardo Penfold, a managing director at Seaport Global wrote in a note. “Bonds should be valid; question is when.”

The notes had rallied since last year after a judge began the process to auction Citgo’s parent company to pay off creditors with claims against Venezuela, including bondholders. The notes jumped another 20 cents in October when the US lifted a trading ban as part of a sanctions relief package. 

Read: JPMorgan Extends Review of Venezuela Bonds for EMBI Index

Tuesday’s decision comes after the federal appeals court in Manhattan in 2022 asked the state’s Court of Appeals to determine whether Venezuelan law invalidates the bonds. However, it is New York law that covers all other aspects of the transaction, including consequences for bondholders, the court said.

--With assistance from Patricia Laya.

(Updates pricing in second paragraph.)

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