Ruling affirms Citgo risk to Venezuelan debts: Update

Updates throughout, adds comment.

Appellate judges today affirmed that companies may seek shares of entities controlling US independent refiner Citgo to satisfy billions of dollars in Venezuelan debts.

The decision could upend control of Venezuela's most valuable overseas asset and a key anchor to the impoverished country's loans, opening a path to compensation for more than a dozen entities with assets expropriated by Venezuelan governments. An auction of Citgo shares could move forward as early as September unless the US Treasury's Office of Foreign Assets Control (Ofac) declares such transactions blocked by US sanctions, a senior financial sector executive close to Venezuela's creditors told Argus.

The unanimous three-judge panel also rejected arguments that third-party bondholders must be considered in reaching that decision, finding that any lenders to national oil company PdV had ample notice of the government's involvement in the company.

Venezuelan attorneys argued that the country's interests in Citgo were immune from such attachments. But the US Third Circuit Court of Appeals panel found that Venezuela's involvement in PdV easily cleared a legal determination that the company effectively served as alter-ego of the Venezuelan government, and that entities seeking assets to satisfy numerous arbitration awards could attach its US companies controlling Citgo.

"Indeed, if the relationship between Venezuela and PdV cannot satisfy the Supreme Court's extensive-control requirement, we know nothing that can," the opinion said.

Judges affirmed a district court finding last fall that Citgo assets were directly held by Venezuela despite the use of US subsidiaries. That finding allowed the defunct mining firm Crystallex, now controlled by New York-based investment firm Tenor, to seek payment of a $1.2bn arbitration award for Venezuela's expropriation of the company's Las Cristinas gold mining assets almost a decade ago.

"The Third Circuit's decision is a crucial step in getting Venezuela finally to honor its legal obligations," Crystallex chief executive Bob Fung said. "We look forward to proceeding with our lien to recover at least part of our expropriated investment in Venezuela."

PdV did not comment, and Citgo and Treasury did not respond to requests for comment.

Appellate court judges in Philadelphia questioned in an April hearing why Citgo should be immune from the billions of dollars of debts accrued by the Venezuelan government. The panel said today that Venezuelan national oil company and Citgo owner PdV failed to show significant separation between the government and the national oil firm.

Citgo's 750,000 b/d of complex refining capacity and fuel network west of the Rocky Mountains make a lucrative target for the country's creditors, who seek more than $150bn. These most valuable overseas assets fall subject to the US court system and an executive branch that does not recognize President Nicolas Maduro's government.

That change in White House recognition has rippled through more than a dozen separate petitions in US courts for recognition of arbitration awards for expropriated assets over the past decade. The US-recognized opposition headed by National Assembly leader Juan Guaido repeatedly requested judges overseeing petitions from oil services companies, defense contractors, plastics manufacturers and ranchers to delay proceedings so the new leadership could review the cases — and judges almost always said yes. The Third Circuit recognized Guaido's representatives as speaking for Venezuela, though noted "there is reason to believe that Guaido's regime does not have meaningful control over Venezuela or its principal instrumentalities such as PdV." The government dropped requests for a stay in this case as oral arguments began.

The appellate opinion dealt another setback to the Venezuelan opposition. Guaido declared himself interim president on 23 January, a move recognized by the US and more than 50 western governments that led directly to US sanctions on PdV. Guaido-appointed directors have controlled Citgo since February. But both the Maduro and Guaido governments now face a potential loss of control over its profitable US refining system and the exit of US oil major Chevron as a key bond payment comes due in October.

Crystallex "repeatedly reached out to Venezuela's interim government to seek a fair settlement that would compensate Crystallex for its property and preserve the value of Citgo for the Venezuelan people," the company said today.

The company was asked if that offer was extended.

"We look forward to proceeding with the legal process to recover the value of our expropriated investment in Venezuela," the company said.