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Bondholders close in on Citgo

Venezuela misses crucial bond payment as danger of losing control of the US refiner looms

The potential threat to Venezuela losing its most prized foreign asset, US-based refiner Citgo, has intensified following the default from the opposition-controlled National Assembly (NA) on a bond due to expire in 2020. However, the US courts have stalled any immediate threat to creditors seizing stakes in the firm.

Venezuelan authorities had been meeting obligations on the state-owned oil company Pdvsa’s 2020 bond—the last still receiving repayments and backed by an indemnity stake in the refiner Citgo. In April, the NA delivered the smaller sum of $70mn. But now the opposition has failed to meet a 28 October deadline for $913mn, raising concerns that bond holders may aggressively pursue stakes in Citgo.

The decision to issue the bond was always controversial. In 2016, on the verge of bankruptcy, Pdvsa refinanced its short-term maturity bonds in favour of the Pdvsa 2020 bond, using 50.1pc of Citgo’s shares as collateral to generate $3.4bn. The remaining 49.9pc was later used in another refinancing measure to obtain funds from Russian firm Rosneft.

The opposition has always questioned the legitimacy of the bond. “The NA claimed the Pdvsa 2020 bond was invalid as a breach of the constitution, because, in their view, the NA’s approval of the bond was necessary, given that those bonds are a contract executed for the national interest and thus subject to such approval,” says Eugenio Hernandez-Breton, partner at law firm Baker and McKenzie. “According to the NA, payment of interest on the Pdvsa 2020 bond in April ‘was made under protest’ and in order to save Citgo's shares from foreclosure.”

The opposition had been appealing to the US to intervene and prevent any seizure and/or sell-off of Citgo. On 24 October, they got their way and the US placed a temporary three-month blockade on any transfer or sale of Citgo’s shares linked to the Pdvsa 2020 bond, barring permission from the Office of Foreign Asset Control.

The opposition has failed to meet a 28 October deadline for $913mn

“The temporary suspension is a lifesaver,” says Hernandez-Breton. “In a case of default, the issue of the validity of the 2020 bond will have to be reviewed by competent courts prior to foreclosure of Citgo shares, and will surely be subject to fierce legal debates.” On 29 October, US-backed opposition leader Juan Guiado launched a lawsuit against the legality of the bond in a New York district court.

The temporary suspension buys the opposition some time but the spectre of a sell-off still remains over the horizon. “Bondholders will probably both negotiate and advance their legal case,” says Francisco Monaldi, fellow in Latin American energy policy at thinktank the Baker Institute. “Rosneft has the remaining shares of Citgo as a collateral, but their debt is almost all paid because they control the marketing of two-thirds of Venezuela's oil exports, so I do not think they would get involved. Other claimants and creditors of Pdvsa like [Canadian gold miner] Crystallex and [US independent producer] ConocoPhillips might get involved in the litigation.”

Citgo would be one of the few productive sources of income for any post-sanctions Venezuela. The refiner is the fifth largest in the US and especially suited to processing heavy sour crude pumped out from Venezuela’s Orinoco reserves. The company has storage capacity of over 22.1mn bl and processing capacity of just under 750,000bl/d from three refineries: Lake Charles (425,000bl/d), Lemont (167,000bl/d) and Corpus Christi (157,000bl/d). The firm generated $32bn in revenue between 2012-18 and last year sold 13.8bn gallons of refined products.

Despite failed efforts from the opposition to oust Venezuelan president Nicolas Maduro earlier in the year, the US is still banking on being part of a future rehabilitation of Venezuela’s oil industry post any regime change. US sanctions have crippled Venezuelan oil output—now down to 645,000bl/d, according to Opec’s most recent monthly oil report.

But the Trump administration on 22 October agreed to grant a three-month extension permitting US companies to remain in Venezuela. Service firms including Schlumberger and Halliburton, as well as operator Chevron, will now wait until 22 January 22 to find out if the waiver will again be renewed.

“This seems to be a pragmatic decision considering that, if Chevron and the service companies leave, cash generating exports will not decline significantly and the projects that Chevron helps to operate will be taken over by Russian or Chinese firms,” says Monaldi. “So [forcing the US firms to pull out] is unlikely to contribute to regime change. It would also make the recovery of the oil sector more difficult once there is a transition.”

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