By Tom Hals
WILMINGTON, Del., Dec 14 (Reuters) - Citgo Petroleum may
look like a tempting target for bondholders of its parent
company, Venezuelan-owned oil driller PDVSA, but the refinery
operator's complex debt structure could make its assets
difficult for creditors to seize, legal experts said.
As Venezuela careens closer to a default, some holders of
PDVSA bonds set to expire in 2020 and backed by a pledge of
Citgo stock are preparing to go to U.S. courts to foreclose on
Citgo shares, according to sources familiar with the situation.
That may not be easy. Energy producer ConocoPhillips Co
has gone to court alleging the pledge of 50.1 percent of
Citgo stock is fraudulent, meaning the PDVSA bondholders will
have a tough time getting their hands on the stock.
"Lots and lots of claimants have been circling Venezuela and
PDVSA, so there is plenty of competition for every scant asset
crumb, which means we should expect challenges at every turn,"
said Anna Gelpern, a professor at Georgetown Law.
The battle over Houston-based Citgo, which was valued as
high as $10 billion during an aborted 2014 sale process,
illustrates the dearth of viable options for foreign creditors
trying to collect from Venezuela.
Venezuela’s Maduro said in November he wanted to restructure
all foreign debt, which includes some $60 billion in outstanding
sovereign and PDVSA bonds. Private estimates put the total
foreign obligations at more than $120 billion owed to creditors
including Russia, China and oil service providers.
Negotiations with bondholders are almost impossible in the
face of U.S. sanctions and the country has been ruled in default
due to payment delays on some bonds, which for years have been a
favorite of investors for their sky-high yields. .
Faced with mounting concern that Venezuela will not be able
to keep up the payments, some holders of around $3 billion worth
of the 2020 bonds are talking to lawyers and advisers about
initiating legal action to seize the Citgo stake.
Legal experts said they would face many hurdles, including
Citgo's issuance of billions of dollars of its own debt. Holders
of Citgo debt could cite change-of-control provisions to demand
immediate repayment if PDVSA's bondholders got their hands on
the Citgo stock, Deutsche Bank said last month in a note to
"We see significant valuation risk in CITGO once the
collateral collection process is triggered given potential legal
challenges and other complications," said the Nov. 27 note by
strategist Hongtao Jiang.
PDVSA bondholders would also have to contend with Russian
oil producer Rosneft, which has a lien on the remainder of
Citgo's stock. The lien, and the legal uncertainty hanging over
Rosneft from U.S. sanctions, could undercut demand for acquiring
Citgo if bondholders were to put it up for a sale, legal experts
Bondholders will also have to compete with other creditors
who are gunning for Citgo.
"It will become a free-for-all," said Mark Weidemaier, a
professor at University of North Carolina School of Law.
One creditor of Venezuela, Crystallex International Corp, a
Canadian gold miner, has already asked a federal judge in
Delaware to void the stock pledge to the 2020 bondholders.
Crystallex says the pledge was a fraudulent transfer of
value from Citgo, which got nothing from the stock pledge, to
PDVSA. With such uncertainty hanging over the stock pledge, the
bondholders will struggle to get full value for Citgo if they
manage to foreclose on the shares, according to legal experts.
Crystallex has said in court papers it has reached an
undisclosed settlement, which requires Crystallex to stay or
withdraw its case in Delaware federal court once it begins
receiving payments from Venezuela, according to court records.
But ConocoPhillips Co launched a similar action last
year in the same Delaware court that also takes aim at undoing
the stock pledge.
A trustee for Crystallex, which is operating in bankruptcy
after Venezuela seized its mining operations, and a spokesman
for ConocoPhillips declined to comment.
Finally, PDVSA could put Citgo's U.S. holding company into
U.S. Chapter 11 bankruptcy, which would prevent creditors from
seizing Citgo stock, the main asset of the holding company.
However, bankruptcy can be chaotic and unpredictable and it
would increase the risk that Citgo could wither during the
process - a risk to both PDVSA as well as bondholders.
Richard Langberg, an analyst with S&P Global Ratings who
follows Citgo, said the significant costs and uncertainty should
give any creditor pause about trying to collect against Citgo.
"On a scale of one to 10," he said of the degree of
difficulty, "it's a nine or a 10."
(Reporting by Tom Hals in Wilmington, Delaware; Editing by
Noeleen Walder, Christian Plumb and Andrew Hay)
First Published: 2017-12-15 00:29:56
Updated 2017-12-15 00:57:02
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