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U.S. court ruling on Cristallex on Citgo made PDVSA bonds tumble


District court says Crystallex can take shares of Citgo holder. That could create a rush from other creditors to lay claim

By Justin Villamil, Jef Feeley, and Tiffany Kary

Petroleumworld 08 13 2018

Bonds from Venezuela's state oil company backed by a stake in Citgo Holding Inc. dropped after a U.S. court ruled that a Canadian mining company can seize shares of the U.S. company that controls Citgo to satisfy a $1.2 billion arbitration award.

The $2.5 billion of notes due in 2020 sank 4.75 cents to 85.5 cents on the dollar, the biggest decline since November. Venezuela's benchmark sovereign notes dipped to a six-month low while Citgo securities were little changed.

The ruling in favor of Crystallex International Corp. sparked concern among Petroleos de Venezuela SA creditors who counted on the stake in Citgo to back their investment in a country and company that have fallen behind on more than $4 billion of debt payments amid an economic crisis. PDVSA's U.S. refining unit is one of the most attractive assets bondholders could try to seize, and the asset-backed notes have been trading at a significant premium to the rest of Venezuela's debt.

The court process of sorting out who has a claim on Venezuela's assets is going to be long and complicated, adding to the confusion for investors, according to Ray Zucaro, the chief investment officer at RVX Asset Management. Representatives from Crystallex and Venezuela have been ordered to confer within a week and meet again with the judge, so the Citgo assets won't immediately be transferred to the Canadian mining company.

“Everyone is going after the collateral now,” Zucaro, who doesn't own PDVSA's secured notes, said in an interview. “There are lots of layers of corporate ownership in the middle and I don't think this is a fait accompli that this is going to be transferred.”

PDVSA has appealed the court's decision, according to filings.

PDVSA's 2020 bonds are backed by a first-priority lien on a 50.1 percent stake in Citgo Holding. The other 49.9 percent of Citgo has been pledged to Rosneft PJSC as collateral for a $1.5 billion loan.

The verdict puts Crystallex “one step closer to unwinding the 2020 bond issuance and the Rosneft transaction, but there are further steps, and they are facing further challenges,” said Richard Cooper, a lawyer with Cleary Gottlieb with expertise in sovereign debt restructurings.

It also puts them a step ahead of other claimants, because they have a judgment. However, Cooper notes, if the judge allows a stay on appeal other parties might catch up to Crystallex by seeking their own rulings while the appeal is ongoing, potentially putting them on even footing by the time it's resolved.

The brief order issued Thursday didn't reveal the reasoning of U.S. District Judge Leonard Stark because his full decision was filed under seal. Both sides are set to meet Friday to discuss making the ruling public, according to court filings.

Venezuela is struggling with rampant inflation and political unrest and is entangled in more than a dozen arbitration cases with foreign companies challenging state takeovers during the past decade. President Nicolas Maduro has expressed an interest in restructuring the nation's billions of dollars in debt but has failed to carry through as sanctions prohibit a transaction with U.S.-based investors.

Crystallex sought the shares as compensation after former Venezuelan leader Hugo Chavez nationalized the Las Cristinas gold reserve in 2011. Venezuela expropriated the gold-mine property and turned it over to PDVSA for no consideration, Crystallex argues.

Other creditors have targeted PDVSA assets in the Caribbean region to satisfy more than $2 billion in judgments. In May, ConocoPhillips moved against some of the Venezuela company's operations on the islands of Bonaire and St. Eustatius after an arbitrator found officials wrongfully confiscated the Houston-based oil company's property in 2007.

— With assistance by Lucia Kassai


Story by Justin Villamil, Jef Feeley, and Tiffany Kary from Bloomberg News. 08 10 2018

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