Q&A: Is Venezuela on the verge of losing its prized foreign asset, Citgo?

After a fierce battle for the seventh-largest U.S. refiner, a U.S. judge began the final hearing on Monday of the sale of shares of the parent company of Venezuelan-owned refiner Citgo Petroleum in order to pay creditors.

In August, a court officer who was overseeing the auction changed his recommendation for the winner to $5.9 billion

A bidding war led to the purchase of the property by an Elliott Investment Management affiliate. He had recommended an offer of $7,4 billion by a unit from Toronto-listed miner Gold Reserve.

Changes have triggered opposition and intensified the a

Creditors and bondholders are pursuing the same assets. The court will hear from all parties, experts and witnesses through Thursday before making a decision on the winner of the auction.

The auction is a result of a case Crystallex, a Canadian miner, filed in Delaware eight years ago against Venezuela. Citgo Holding's parent company, PDV Holding was found liable by the court for Venezuela's past debts and expropriations. This allowed over a dozen creditors to seek compensation for nearly $19 billion.

After a series of delays, the bidding round that was started this year should be completed as soon as Judge Leonard Stark has approved a winner.

In recent months, Elliott's Amber Energy and Gold Reserve subsidiary Dalinar Energy were neck and neck and improved their bids before the hearing. Commodities house Vitol and an affiliate of Contrarian Funds, as well as a consortium led Black Lion Capital Advisors competed.

Amber Energy, the frontrunner in the race for the Gold Reserve Group's claimants' money, proposes to pay out nine of 15 claimants.

Amber offered to pay $2.1billion to holders of a Venezuelan bond that had defaulted and was collateralized by Citgo equity in order to settle an important claim, as well as remove a major obstacle to its takeover bid of Citgo.

Gold Reserve and some creditors are opposed to an immediate payment of the bond holders. They claim that the validity of the bonds in New York has not yet been determined and that the payment will deprive Delaware claimants of their proceeds.

What could be the possible loss for Venezuela?

Venezuela would lose its largest overseas asset if it fails to retain equity in the refinery and its U.S. parent companies. With a foreign debt of $150 billion, the country has already lost assets in Europe, Asia and elsewhere to creditors.

Judge Stark left the door open for Venezuelan parties to make an offer. They would have to get the backing of politicians from both Caracas as well as Washington. This is a difficult task given U.S. Sanctions on Venezuela and other strained ties.

In a Friday press conference, Horacio Medina said that if court proceedings proceed as planned, Citgo's takeover would occur in the second quarter of next year.

Prior to the sanctions, Citgo's 807,000-barrel-per-day refining network was a primary processor of Venezuela's heavy sour crudes. Citgo cut its ties in 2019 with Venezuela's state-owned PDVSA. Venezuela is now struggling to find markets for its oil. The Houston-based refiner, however, has turned to other crude sources.

Venezuela's opposition has been lobbying Washington and funding legal defenses to keep Citgo for years. Treasury Department must approve the winner of the auction. Treasury Department has protected Citgo in recent years from creditors.

Citgo, according to opponents of Venezuelan president Nicolas Maduro, could help the nation's economy recover if democracy was restored. Maduro officials rejected U.S. sanction and called the auction theft of a state asset.

Can creditors claim post-auction compensation?

Yes. Yes.

If they are not satisfied with the results, creditors who were unhappy last year about the result of the bidding round due to the conditions set by the winning company, Amber Energy, may submit an objection.

The Delaware courts and other U.S. court can continue parallel proceedings in other U.S. jurisdictions. These cases have so far not made significant progress to enforce claims, or to prove that PDVSA U.S. subsidiaries are liable for Venezuelan debts. This is a step necessary to pursue Citgo assets.

Three of the original 18 creditors cleared by the court, due to accumulating legal costs and uncertain prospects for recovery, resigned. Other participants did not meet all the court requirements.

All creditors will be compensated

Unlikely. Citgo's value was up to $13 Billion in the Delaware case. However, the total bid value in all rounds of bidding has been below $11 Billion.

Citgo's profits dropped from $2 billion to $305 millions in the last year. Citgo's second quarter profit was a return to profitability after two quarters of losses.

This suggests that some of the registered creditors who collectively claim $18,9 billion may not be eligible to receive any distributions.

(source: Reuters)