Citgo auction at risk as Venezuelan bondholders file parallel claims

Holders of billions in Venezuelan bonds, notes and other securities have emerged in the last minute as protagonists in an American court case that will decide ownership of oil refiner Citgo Petroleum. They threaten to derail a compensation auction for more than a dozen firms to compensate them for unpaid debts or expropriations. Two groups of holders have taken their cases to other U.S. court to enforce them, and are pursuing the Citgo assets which industrial conglomerates, oil companies, and mining firms have pursued for years.

These court cases were designed to circumvent court payout priorities. They have caused new delays in a seven-year-old case, and increased uncertainty about which company is best positioned to acquire the seventh largest U.S. refining firm. Amber Energy, an affiliate of Elliott Investment Management, imposed conditions on its $7.3 billion bid for Citgo Holding's parent company, PDV Holding. This made the offer highly uncertain. PDV Holding's only asset is Citgo's 807,000-barrel-per-day refining network and linked facilities.

If the Delaware court that is handling the auction does not block the rival claims then the Elliott affiliate can withdraw their offer in a matter of days, causing the auction to be in chaos.

Who is First?

Holders, led by Gramercy Distressed Opportunity Fund, want the Delaware court to prioritize their payments. This would reduce the amount of potential proceeds available from the share sale to other creditors and leave a number of them with nothing. ConocoPhillips and Gold Reserve, as well as Crystallex miner, who brought the case in which Citgo's parent was found liable for Venezuelan debts, are among the creditors that oppose allowing bondholders the opportunity to skip the line.

If the Gramercy claim is not barred, it could upset the carefully constructed priority order of the court that starts with Crystallex Tidewater ConocoPhillips O-I Glass Huntington Ingalls.

Citgo, Venezuela’s crown jewel in foreign assets, was valued at up to $13 Billion as part of this auction, while claims on these shares totaled $21.3 Billion. Venezuela's external, largely unpaid debt is approximately $150 billion.

CAN THE BONDHOLDERS BE STOPPED? Robert Pincus has asked the judge to prevent creditors who are already involved in the auction from suing other courts. Judge Leonard Stark will make a decision in the near future, which may be appealed, further delaying or stopping the sale. The court officer could also have to negotiate with another bidder or scrap the auction.

A second group of creditors could also be given priority, namely the holders of bonds that are collateralized by Citgo equity. Stark approved this year a motion that included payment provisions in bids. They did not win their court cases regarding the validity of the bonds, but they were still allowed to participate in the discussions. Pincus was unable to come to an agreement on payment with these bond holders in the context of the bid negotiations within the deadline established by the court. Stark stated last month that because of the numerous obstacles, Elliott's affiliate's offer was not confirmed by the court and the deadlines for the process will not be enforced unless a new schedule has been approved.

What are other creditors doing?

Stark has not blocked the holders of the promissory notes from suing other courts. Siemens Energy filed a lawsuit similar to this one in Texas earlier this month, seeking to recover about $200 million of a promissory notes that Citgo's ultimate owner, the state-owned PDVSA, had not paid. Lawyers representing Venezuela and creditors who do not own Venezuelan notes or bonds have criticised the negotiations between Pincus Energy and Amber Energy. They claim that the process is opaque and the amount of the bid is insufficient to cover even the first claims.

The judge explained that they will have time to object to both the offer and the process, once a new schedule is approved. This would likely delay the final hearing of the case until early 2025.

(source: Reuters)