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Citgo on the Line with PDVSA default, U.S. may rescue

Marco Bello /Bloomberg

With Citgo's Future on the Line, U.S. Prepares 11th-Hour Rescue

- PDVSA likely to default on $913 million payment due Oct. 28
- If payment is missed, creditors could try to seize Citgo

By Ben Bartenstein / Bloomberg

Petroleumworld 10 23 2019

The Trump administration is preparing to take action Friday with a measure to protect Venezuela's most prized asset abroad from creditors before a key debt payment, according to people familiar with the matter.

U.S. officials are discussing a last-ditch move that would prevent holders of Petroleos de Venezuela 's 2020 bonds, backed by 50.1% of Citgo Holding Inc. 's shares, from seizing the collateral if there's a default. A decision must be made in the coming days as the clock ticks down on PDVSA's $913 million payment due Oct. 28.

Deliberations in the Trump administration have picked up as advisers to Venezuelan opposition leader Juan Guaido, recognized by the U.S. and nearly 60 nations as the country's rightful leader, signal they lack the money to make the debt payments and the largest reported holder of the notes -- London-based Ashmore Group Plc -- insists on its right to the collateral.

The Treasury Department declined to comment, as did PDVSA, Citgo, Ashmore and Guaido's office.

READ: Looming PDVSA Default Pits Ashmore Against Venezuela's Guaido

While some U.S. officials are leery of interfering in the bond market or property rights, the White House also worries that it would be a political disaster for Guaido to lose Citgo, the Houston-based refining unit of Venezuela's state-owned oil company, the people said. President Nicolas Maduro's regime could blame that on Guaido, Trump and Wall Street, they said.

As a result, officials in Washington are acknowledging the increasing likelihood that the Treasury Department's Office of Foreign Assets Control revokes General License 5 , effectively putting transactions related to the PDVSA 2020 bonds on the same footing as other Venezuelan financial deals that are prohibited. There's still some opposition to such a move, the people said, and talks continue. The U.S. has refrained from formally promising this to Guaido's representatives because that may dissuade them from negotiating with creditors, the people said.

“If OFAC revokes GL5 and makes changes to the related FAQ guidance, the enforcement on the collateral securing the 2020 bonds will be unauthorized,” said Cecely Hugh, investment counsel in emerging-market debt at Aberdeen Standard Investments in London. “This means that the collateral would be effectively worthless while the sanctions are in place.”

The bonds have fallen to about 33 cents on the dollar as skepticism grew about the payment, from about 90 cents just a few months back.

The debt payment is complicated by Venezuela's precarious political situation after countries began recognizing Guaido as president in January, citing irregularities surrounding Maduro's re-election in 2018. With the U.S.'s support, Guaido and his allies effectively run Citgo, yet have little operational control over PDVSA and barriers to government finances.

Guaido's team made a $71 million interest payment on the 2020 bonds in May, which it called a “payment under protest.” On Oct. 15, the opposition-led National Assembly approved an accord calling the notes unconstitutional because they weren't approved by the legislature. Creditors argue the prior payment legitimized the debt.

— With assistance by Sydney Maki, and Fabiola Zerpa


Story by Ben Bartenstein from Bloomberg. / 10 22 2019


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