Citgo, the most potent symbol of the US-backed Venezuelan opposition's governing aspirations, is slipping closer to a watershed bond foreclosure.
The US refiner is a subsidiary of Venezuela's national oil company PdV that is in default on a 2020 bond, fruit of a controversial 2016 swap issuance. Although Venezuela and PdV have at least $150bn in unpaid debts around the world, this particular bond stands out for its collateral: 50.1pc of the shares in Delaware-based Citgo Holding.
The closely watched 2020 8.5pc interest bond matures on 27 October, and bondholders that include prominent institutional investors such as Ashmore, Fidelity and T Rowe Price are owed around $1.8bn-$1.9bn on that date.
The mainstream opponents of Venezuelan president Nicolas Maduro's government have controlled Citgo since early 2019, after the US imposed oil sanctions to try to oust him in favor of National Assembly speaker Juan Guaido. Although Guaido's US-supported parallel administration made a May 2019 coupon payment of $72mn, it sued to invalidate the bonds instead of making a subsequent $914mn payment of principal and interest last October. The lawsuit coincided with a US Treasury block against bondholders exercising their right to Citgo as collateral.
Guaido's representatives argue that a New York federal court should invalidate the bond because it was never approved by the National Assembly in Caracas.
The argument has gained no traction, partly because it would set a precedent for other foreign issuers to walk away from their US obligations based on political changes at home, debt experts say.
This is why a pending US government opinion ahead of the next New York court hearing on 25 September is unlikely to transmit more than nominal support for keeping Citgo in the Venezuelan opposition's hands.
Bondholders blocked
For now, the bondholders remain blocked from enforcing the lien on Citgo by the ongoing suspension of General License 5, a provision of US sanctions that freed them to act on the bond conditions.
The suspension has been rolled over every 90 days since it was first issued in October 2019, and it is next due to lapse on 20 October, the eve of the bond maturity — as well as the pivotal 3 November US elections in which Donald Trump is seeking another four-year term.
The Venezuelan cause is a key Trump campaign theme because of its perceived appeal to a subset of Latino voters in the swing state of Florida. As a result, the US Treasury Department's Office of Foreign Assets Control (Ofac), the agency that administers sanctions, seems likely to renew the suspension for another three months rather than expose the mainstream Venezuelan opposition to another embarrassing defeat. That brings the next expiry right up to the January presidential inauguration — either of Trump or his rival Joe Biden. By then, Venezuela will have lost its campaign value, making it easier for the US to let the bondholders foreclose on Citgo.
Whether this happens in October or January, the judicial die seems to have been cast in favor of the bondholders rather than Crystallex, the former Canadian mining company now controlled by New York hedge fund Tenor Capital Management that is challenging Venezuela in a parallel Delaware federal court case.
Crystallex is pressing to take over Citgo Holding's parent PdV Holding as compensation for the seizure of its Venezuelan gold mining assets a decade ago. A win for Crystallex, based on an alter ego argument that Citgo is a stand-in for the Republic of Venezuela, would still require an Ofac license to execute. The bondholders' case, which is based on an explicit pledge, is more straightforward than the claim of Crystallex, or others such as ConocoPhillips seeking Citgo shares to satisfy international arbitration awards against Venezuela.
Sealed fate
The loss of Citgo could hasten the disintegration of the Venezuelan opposition, which is already sharply divided over whether to participate in 6 December National Assembly elections. This week another member of Guaido's team of exiled technocrats, parallel PdV board chair Luis Pacheco, made public his plan to step down after key court hearings over the next three weeks. He and other former Guaido associates have previously warned that Citgo is becoming harder to defend.
One last option for the opposition would be to enter Citgo's two parent companies into Chapter 11 bankruptcy. But the lengthy process would bear the same political price for Guaido of effectively losing an asset that he had pledged to protect. If he is pushed aside in the assembly elections as well, Maduro will have succeeded in crushing his main rival and surviving the sanctions that have kept Venezuelan oil out of the US market for close to two years.
