Q&A: Auction heats up for Venezuelan refiner Citgo as US court considers bids

After delays, the U.S. auction for Venezuelan-owned U.S. refining company Citgo is heating as bidders increase their offers. This is good news for creditors who are seeking compensation for Venezuelan debt defaults and for a wave nationalizations that occurred under the late Venezuelan president Hugo Chavez.

Citgo is Venezuela's crown jewel in terms of foreign assets. The bidding round that ends this month has been spiced up by last-minute bids, compared to a dull round last year.

Recently, units of commodities house Vitol as well as hedge fund Elliott Investment Management submitted better bids in order to compete with the frontrunner, a Gold Reserve subsidiary.

Judge Leonard Stark extended the bidding period until Friday, and moved the final auction hearing to mid-September due to the intensity of the competition.

The case could help pay up to 15 creditors who have been affected by Venezuela's debt defaults or expropriations. Many of those involved in the auction and observing it are unsure about the metrics that the court officer will use to determine which offer is the best.

What factors will be taken into consideration?

The team of Robert Pincus, a court officer, has found it difficult to compare the price of the bids with the "certainty" of the takeover.

The winner of the auction will have to navigate through a complicated process in order to acquire assets despite objections, challenges, and attempts by other creditors to seize those assets.

Some bidders will close a deal with Citgo's parent company and then risk parallel lawsuits, which could result in side payments made to creditors. Some bidders are looking to reach settlement agreements in advance to minimize the risk of a future lawsuit.

After the resolution of several legal cases over the past year, the main payment consideration is now to holders of a Venezuelan defaulted Bond collateralized by Citgo equity. This is true even though holders haven't won their case in New York against Venezuela. Next month, a key decision is expected.

The bids include non-cash considerations, credit bids, and cash offers. It is difficult to compare and evaluate these offers, as creditors can accept or reject certain components.

What was the previous priority of the judge?

The court's evaluation criteria have changed since last year when the majority of creditors rejected Elliott's Amber Energy affiliate's $7.3 billion conditional proposal due to an proposed payment priority scheme that would prevent many from receiving proceeds in the near future.

In an earlier competition to select a stalking-horse bid, the court chose a $3.7billion offer from Contrarian Funds affiliate Red Tree Investments as the first round. This bid was chosen primarily because it included an additional $3 billion payment made to bondholders.

But Judge Stark instructed the evaluators that they should prioritize the price of the bond over the certainty of the closure when choosing the winner. This was to ensure that the proceeds meant for creditors who have been lining up in Delaware since 2017 would not be eaten up by the payment made to the bondholders.

What criteria will be used to determine the winner?

Even after the procedural hearing this week to discuss the subject, it remains unclear.

Pincus selected the Gold Reserve Group's $7,4 billion bid as the winning offer in July. This offer does not include a payment agreement with bondholders.

The bid was challenged later by other offers. Amber Energy, for example, included a payment agreement of $2.86 billion with the holders.

What happens after?

ConocoPhillips and Gold Reserve are among the creditors who have taken legal action outside the U.S. in order to seize Venezuelan assets such as tankers, bank accounts and facilities controlled PDVSA, the Venezuelan state energy company.

If they're not satisfied with the results of the auction, creditors can object. Other creditors can continue their cases in parallel with them outside Delaware.

It is unlikely that all fifteen creditors who collectively are trying to recover around $19 billion will receive proceeds from this auction. Citgo's value was up to $13 Billion in an independent evaluation ordered by the Court. However, bids have not exceeded $11 billion.

Citgo, America's seventh largest refiner, registered losses from the fourth quarter of 2024 to the first quarter of this year. In the second quarter, the company turned a profit.

(source: Reuters)