US Treasury Department Prolongs CITGO's Immunity Amid Dispute Over Asset Auction in Venezuela
Breaking: US Prolongs Ban on PDVSA 2020 Bond Transactions, Casting Uncertainty over CITGO Sale
Caracas, November 9, 2024 - The United States Treasury Department's Office of Foreign Assets Control (OFAC) has amplified the prohibition on transactions relating to Venezuela's defaulted PDVSA 2020 bond, extending the ban until March 7, 2025.
In a recent decision, OFAC issued General License 5Q, forbidding any transactions involving the debt instrument in question. PDVSA, Venezuela's state oil company, issued the $3.4 billion bond back in 2016, offering 8.5 percent interest, primarily in exchange for the swapping of prior debt close to maturity.
The PDVSA 2020 bond, initially due in 2020, was secured by 50.1 percent of shares owned by CITGO - PDVSA's US-based refining subsidiary. The bond was considered a priority by the Nicolás Maduro government, which continued servicing it until US sanctions made payment impossible.
Since 2019, the US government has engaged in efforts to prevent bondholders from exercising collateral rights. Their primary concerns revolved around safeguarding the political prospects of the Venezuelan self-proclaimed "interim government" led by Juan Guaido. Washington's recognition of the parallel administration awarded them control over US-based assets, including CITGO.
Following the "interim government's" dissolution in early 2023, the US Treasury continued to extend the protection as CITGO became the subject of a court-mandated auction. With an impending sale of the refiner, it would then be left to new ownership to negotiate with the bondholders.
Last October, Delaware District Judge Leonard P. Stark started the sale of shares belonging to PDV Holding (PDVH), CITGO's parent company, to meet various claims against the Caribbean nation, mostly stemming from international arbitration awards. Canadian miner Crystallex initiated the process to collect $1 billion granted by the World Bank's ICSID court as compensation for the nationalization of a mine in Venezuela in 2008. In recent years, several other corporations managed to peg similar claims to the Delaware auction, inflating liabilities to a total of $21.3 billion.
Guaido and his associates have faced intense scrutiny for their moves that potentially jeopardized Venezuela's US-based refiner. Their public statements and actions have been leveraged by US courts to issue so-called "alter ego" rulings, enabling companies to collect debts owed by the Venezuelan state via PDVSA and its subsidiaries.
In September, Delaware's auction's court-appointed Special Master Robert Pincus selected a winning bid of $7.3 billion from Amber Energy, a subsidiary of vulture hedge fund Elliott Investment Management. The CITGO ownership transfer requires US Treasury approval, though OFAC has promised a "favorable licensing policy."
The sale, however, has faced uncertainty due to parallel lawsuits as some firms attempt to "skip the line" to collect on their owed amounts. Pincus has requested that Judge Stark bar auction creditors from pursuing compensation separately and approve a schedule that would bring the sale to a close in March 2025.
Furthermore, corporations have voiced opposition to the bid's low amount. Firms at the top of the list, including Crystallex and US oil giant ConocoPhillips, have objected to the sale terms and requested that the court take action to find new bidders. Gold Reserve, another Delaware claimant, has apparently pledged to submit a superior bid if it can review CITGO's financial information.
Meanwhile, Elliott has defended its offer, which will reportedly include financing from Barclays and Citigroup. One contentious point in the proposed sale involves setting up an escrow fund to negotiate with outside claimants, such as the PDVSA 2020 bondholders. This process would delay payments and further reduce the total amount meant for auction creditors.
Recently, Amber proposed an alternative bid totalling $5.3 billion, offering to pay creditors directly once the sale is complete. PDVSA 2020 bondholders would be remunerated from a separate escrow account. Pincus will consider both offers as well as potential "top-up" bids.
Apart from the US Treasury bans, PDVSA 2020 bondholders face another obstacle: a scheduled court reexamination of the bond's validity. Should the bond be found invalid, it could lead to years of litigation over the debt instrument.
Valued at $11-13 billion, CITGO owns refineries in Illinois, Louisiana, and Texas with a combined processing capacity of 769,000 barrels per day (bpd). It additionally holds pipelines and more than 4,000 service stations, mainly along the US east coast.
The Venezuelan government has denounced the prospective loss of its most valuable foreign asset as "the theft of the century."
Updated on Nov. 11 to reflect Elliott's new $5.3 billion alternative bid.
Key Insights:
- The PDVSA 2020 bondholders (owed over $2 billion) and Elliott Investment Management play significant roles in the ongoing legal dispute over CITGO’s sale.
- The process center's around the New York court's ruling on PDVSA 2020 bond validity. If upheld, bondholders could potentially disrupt CITGO’s sale unless compensated through negotiated terms.
- Red Tree's proposed agreement aims to neutralize the bondholders’ claims via debt conversions at CITGO, potentially reducing litigation risks. If bondholders challenge the sale, however, it could lead to delays or even derail the auction.
- Despite the extension of the ban by the US Treasury Department on PDVSA 2020 bond transactions until March 7, 2025, the impending sale of CITGO may affect negotiations with PDVSA 2020 bondholders.
- The ongoing court-mandated auction for CITGO, which is valued at $11-13 billion, has become a major point of contention in the finance, business, and politics of Venezuela, partly due to the $2 billion owed to PDVSA 2020 bondholders.
- In the midst of the ongoing legal dispute over CITGO's sale, PDVSA 2020 bondholders, along with Elliott Investment Management, hold significant influence and could potentially disrupt the sale without appropriate compensation or negotiated terms.
- Geopolitical implications and general-news interest heighten as bondholders, US courts, corporations, and the Venezuelan government continue to navigate complex financial and legal issues pertaining to CITGO and its assets.
- With potential delays or derailment of CITGO's sale looming, reducing litigation risks through debt conversions at CITGO, as proposed by Red Tree, could become essential for a successful resolution and the transfer of ownership.
