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PDVSA Citgo close to be auctioned off

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Ashmore has most at stake in event of PDVSA 2020 bond default
Source: Bloomberg NOTE: Percent holdings compiled from latest available filings

Looming PDVSA Default Pits Ashmore Against Venezuela's Guaido

- PDVSA 2020 notes are only Venezuelan bonds not in default
- Ashmore is largest reported holder of Citgo-backed securities

By Ben Bartenstein and Sydney Maki / Bloomberg

Petroleumworld 10 16 2019

Ashmore Group Plc and Venezuela's government may be headed for a legal battle as a potential default on the state oil company's 2020 bonds sets off a rush to lay claim to the nation's most prized asset abroad.

Ashmore, which owned about half the securities as of June 30, has urged Petroleos de Venezuela to make the $913 million payment on its 2020 notes due Oct. 28, yet the team advising National Assembly President Juan Guaido claims it doesn't have the funds, three people familiar with the matter said.

What happens next is critical for Venezuela because the bonds are backed by a 50.1% stake in Citgo Holding Inc., the U.S. refining company that's a unit of PDVSA and thought of by many Venezuelans as part of their patrimony. If the oil company defaults, London-based Ashmore could set in motion legal proceedings that may cause Citgo to be auctioned off to the highest bidder to pay back creditors.

That's forced PDVSA's ad hoc board and Guaido's attorney general to consider seeking an injunction against MUFG Union Bank , the trustee on the bonds, to prevent it from trying to sell Citgo, people familiar with the matter said.

The argument would be that the 2016 debt swap that created the notes was invalid because it wasn't approved by the opposition-led National Assembly, the people said. The legislative body is set to discuss the matter Tuesday morning, according to an agenda obtained by Bloomberg.

The threat of seeking an injunction “could be a gambit to get investors to settle,” said Russ Dallen, managing partner at consultant Caracas Capital in Miami. “If bondholders think they won't get their collateral, they may be more willing to reach a deal with the PDVSA board and the Guaido administration, which is the preferred outcome for everyone.”

Jan Dehn, a spokesman for Ashmore, said the firm keeps “all lines of communication open,” although he declined to comment on talks with Guaido's team. “I don't think anybody is expecting to get money immediately,” he said.

The situation is made all the more complicated because of Venezuela's strange political situation at the moment. Guaido, whom the U.S. and almost 60 other nations recognize as Venezuela's rightful leader, and his allies effectively run Citgo, but have little operational control over PDVSA and no access to government finances. An official in the government of President Nicolas Maduro, an international pariah under U.S. sanctions, said that the PDVSA 2020 bond payment was no longer its problem and a default may deal a death blow to Guaido, whose approval rating fell in September to a record low .

Citgo is “ confident ” a solution will be reached that fits the Trump administration's goal of saving the company from “Maduro and his financiers,” Luisa Palacios, Citgo's chairwoman, said in a statement. It's unrealistic to expect Guaido's team to pay almost $1 billion to satisfy “irresponsible debts in the midst of an unprecedented humanitarian crisis,” she said.

PDVSA's, MUFG's and Guaido's press offices declined to comment.

The face-off follows a months-long lobbying effort by Guaido's team for an executive order shielding Citgo from creditors. President Donald Trump's administration has balked so far. Right-wing groups, including Grover Norquist's Americans for Tax Reform, have argued that intervening would interfere with property rights.

But a bipartisan bloc of U.S. senators and representatives including Marco Rubio, Ted Cruz and Lizzie Fletcher has urged the president to take action . They argue that a PDVSA default would open the door for Russia's state oil giant Rosneft to take control of Citgo shares. PDVSA pledged a 49.9% stake in the Houston-based refiner to Rosneft as collateral on a loan in late 2016. Rosneft said Friday that it “has no intentions to enter into real ownership and management of the company.”

U.S. Treasury Secretary Steven Mnuchin has previously said that, in the event of a PDVSA default, Citgo's loan from Russia would be reviewed by the department's Committee on Foreign Investment in the U.S., which can derail deals on national security concerns.

Canadian miner Crystallex International Corp. also has a claim on Citgo -- $1.4 billion in Citgo Petroleum Corp. stock -- resulting from Venezuela's nationalization of the gold industry in 2011.

Several Guaido advisers have suggested that the PDVSA 2020 bonds are illegitimate . They cite Article 150 in the Venezuelan constitution, which says the National Assembly must approve any contracts of national interest. PDVSA has not customarily gotten the legislature's consent for its borrowing, yet their argument is that a bond backed by Citgo, the nation's crown jewel abroad, is in the national public interest.


A recommended op-ed: ----> Should Creditors Pay the Price for Dubious Bonds? by Mitu Gulati, et al @ProSyn

— Jose I. Hernandez G. (@ignandez) October 9, 2019


The PDVSA 2020 notes, Venezuela's only performing bonds, have tumbled to about 35 cents on the dollar from 90 cents in late June amid concern over a default and forced selling after JPMorgan Chase & Co. trimmed the nation's weight in its benchmark indexes. The nation and its state-owned companies have defaulted on some $60 billion of debt.

Some of the largest holders of the PDVSA 2020 bonds have said they would be willing to accept payment delays. Guaido's advisers have been meeting with them in hopes of striking a deal to extend maturities on the PDVSA 2020 bonds in exchange for a higher coupon rate. But a potential deal has been derailed as Ashmore holds out.

“I think the legal battle is coming,” said Francisco Ghersi, managing director of Knossos Asset Management, which holds Venezuelan assets but not the PDVSA 2020 bonds. “They want their money back -- no matter what.”

— With assistance by Jose Enrique Arrioja, Fabiola Zerpa, and Alex Vasquez


Story by Ben Bartenstein and Sydney Maki from Bloomberg. / 10 14 2019


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