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ISSUES....
Inside, confidential and off the record


PDVSA CITGO bonds a sting

Venezuela's Citgo and the Revolution's Praying Mantis School of Business

Investing in Venezuela has always been like Praying Mantis love.  From the front, BolivarianVenezuela has those big beautiful Miss Venezuela eyes and those angelic clasped praying hands inspiring trust and confidence.  And from behind, Venezuela offers those big Kim Kardashian size profits and yields.   While investors in Venezuela -- from oil companies, to airlines, to consumer products corporations -- have all been lured to their demise, bond holders have until the last 2 years been spared from most Praying Mantis cannibalism, and the sex for bondholders has been great!  Even if Venezuela has not paid shareholders of ExxonMobil, ConocoPhillips, or the Koch brothers' Fertinitro, Venezuela paid the bondholders handsomely! Always!  But the first warning shot was steel company Sidetur, which the Venezuela government expropriated and then didn't pay bondholders (or shareholders) in 2013.  But in this last year, bond holders have also finally gotten their heads ripped off.  And now that Jungle Praying Mantis School of Business is landing on American shores.

This week those lessons spread to American bondholders in a US company owned by Venezuela in the US, as oil refiner CITGO began the process of swindling bondholders.

In July, CITGO issued $650 million in new debt with seemingly strong covenants to protect bondholders.  The first hint of doom for bondholders should have been the lawyers who wrote Venezuela's side of the Citgo bond offering memorandum – Curtis, Mallet-Prevost, Colt & Mosle.  Curtis Mallet's Chairman and former Managing Partner, George Kahale III, is the ace in Venezuela's arsenal and has been the Bolivarian Republic's chief defender in their multitude of expropriation cases.  The guy is better than good – he is the Red Baron of their legal defense, a virtual Prince of Darkness.

Still, the Bond Prospectus seems to have some pretty strong covenants to protect existing lenders and bondholders from just the sort of thing the Citgo is now trying to do:

“The New Senior Credit Facility will also be governed by a financial covenant providing for an indebtedness to total capitalization ratio of no more than 60%, to be calculated on a consolidated basis and for each consecutive four fiscal quarter period.

Payments of Dividends. The New Senior Credit Facility will allow us to pay dividends equal to 100% of our cumulative net income (commencing from April 1, 2014 and excluding the aftertax effect of gain on sales of assets) plus net after-tax proceeds from certain permitted assets sales. The New Senior Credit Facility will prohibit us from paying dividends during the existence of an event of default and to the extent payment of dividends would trigger an event of defa ult, and further restrict our payment of dividends by instituting a number of debt incurrence tests, including the following:

• minimum liquidity of $500 million post-dividend; and

• maximum indebtedness to total capitalization of 55% post-dividend.

Incurrence of Indebtedness. The New Senior Credit Facility will allow us to issue the notes offered hereby. In addition, the New Senior Credit Facility will allow us to issue up to $1,000 million in additional secured and unsecured indebtedness, a portion of which indebtedness may be incurred in the form of fixed rate IRBs. To the extent we issue additional secured indebtedness, it may share in the collateral securing the New Senior Credit Facility and the notes offered hereby on a pari passu basis. We currentl y have $108 million IRBs outstanding. All but $3 million of our outstanding IRBs will be secured on an equal and ratable basis by the collateral securing the notes and the New Senior Credit Facility.”

Venezuela's $650 Million Citgo 6.25% of 2022 Offering Memorandum ( Published by Latin American Herald Tribune )

THE STING

How is Venezuela getting around these rules which restrict the ability of PDVSA to dilute CITGO's credit quality and the ring-fencing which includes a debt/cap maximum of 60%, with a lower 55% test for purposes of making distribution to the parent; and a restricted payment basket which limits the ability of CITGO to make distributions to its parent. 

Two major moves:

1.- They are forming a new company called Citgo Holding, Inc. which will issue the debt and putting it above Citgo Petroleum Corporation in the food chain.

2.- They are taking the Terminals and Pipeline assets – which, though mentioned in the prospectus were not security for the original bondholders -- and getting them out from underneath the bondholders and SELLING THEM TO THEIR OWN NEW HOLDING COMPANY for $750 million as they suck out the money. This new company, Citgo Holding, Inc., does not yet show up in the database of the State of Delaware Corporations office (as of 23 January 2015).

See: PDVSA CITGO to Issue $2.5 Billion in Debt to Give to Venezuela

Russ Dallen / Caracas Capital Markets / 01 23 2015

ISSUES....01/26/2015 - Send Us Your Issues

ISSUES.... Inside, confidential and off the record

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