Who Gets Citgo’s Assets If Venezuela Defaults?

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Venezuela’s bondholders have long held that if the South American country ever defaulted, they’d be able to seize its refineries and almost 6,000 gas stations in the U.S.

That notion is starting to unravel, just as plunging oil prices, a collapsing economy and dwindling foreign reserves have made swaps traders almost certain that Venezuela will renege on its obligations in the next five years.

Creditors would have a hard time convincing U.S. courts that Citgo Petroleum Corp., the Houston-based unit owned by Venezuela’s state oil company, is legally an “alter ego” of the government and responsible for its obligations, according to law firms Cleary Gottlieb Steen & Hamilton LLP and Buchanan Ingersoll & Rooney. For almost two decades, bondholders have assumed the ability to seize Citgo assets would deter Venezuela from stopping debt payments, which has propelled gains of 834 percent, according to Carl Ross, a senior sovereign analyst at Grantham Mayo Van Otterloo & Co.

Bondholders’ ability to get their hands on Citgo is “practically nil,” David Fernandez, an attorney at Buchanan, said in a telephone interview from New York. “Citgo is not assuming any liability or responsibility for any of Venezuela’s debts or obligations.”

Officials with Venezuela’s Information Ministry and state oil company Petroleos de Venezuela didn’t respond to e-mails seeking comment. Fernando Garay, Citgo’s public-affairs manager, declined to comment.

Bonds Plummet

The nation’s benchmark bonds due 2027 sank to a record low of 35.8 cents on the dollar today after President Nicolas Maduro wouldn’t rule out the possibility of default in televised speeches over the weekend. They rebounded to trade at 37.88 cents as of 1:57 p.m. in New York.

“There is no possibility of default, unless we would decide to not pay anymore as part of an economic strategy for development,” he said Dec. 13. “And that’s not the strategy that has been constructed in these years of economic thought laid out by Hugo Chavez.”

Maduro, who succeeded his late predecessor Chavez in 2013, also said he had no plans to curb gasoline subsidies and that he will keep a 6.3 bolivar-per-dollar fixed exchange rate for priority imports. Analysts including Eurasia Group’s Risa Grais-Targow and Bank of America Corp.’s Francisco Rodriguez say a devaluation would help ease a scarcity of dollars in a country plagued by shortages of everything from toilet paper to toothpaste.

Panel Discussion

The comments pushed the upfront cost to protect Venezuelan debt for five years with credit-default swaps to 68.8 percent, implying a 99 percent probability of non-payment, according to CMA data.

Deepening concern Venezuela will default led some 150 investors, lawyers and analysts to attend a panel discussion on potential scenarios organized by Cleary Gottlieb on Dec. 1 in New York, according to interviews with six attendees who asked not to be identified because the meeting was private.

Speakers at the event included partners Lee Buchheit, who has represented countries from Iceland to Greece in debt negotiations, and Carmine Boccuzzi, an attorney for Argentina in its decade-long battles with creditors, according to a copy of the agenda.

One of the topics discussed was whether Citgo oil stations could be seized as collateral, they said. If Venezuela defaulted, it would be difficult for the nation’s bondholders to prove that they could confiscate Citgo’s assets, they said.

‘Very Difficult’

Citgo is owned by PDVSA through PDV Holding Inc. and its subsidiary PDV America Inc., which are incorporated in Delaware. While the board members are appointed by Venezuela’s president, the government is not liable for the obligations of PDVSA or the obligations of its subsidiaries, according Citgo’s bond prospectus.

If Citgo is “not directly run and administered by the Venezuelan government, there are layers of bureaucracy in the corporation itself that make it very difficult to attach any assets,” said Buchanan’s Fernandez. “It’s not like licking a stamp and putting it on an envelope.”

Citgo is capable of refining 749,000 barrels of oil a day at facilities in Texas, Illinois and Louisiana, and operates 5,900 Citgo-branded gasoline stations. Venezuela said in October that it had scrapped a plan to sell Citgo in deals with price tags estimated from $7 billion to $15 billion, according to court papers.

Still, Citgo’s representatives approached potential buyers as recently as November, said people familiar with the sales campaign who asked not to be identified because the talks are private.

Scare Off

Bondholders wouldn’t be the only ones looking to Citgo to recoup their money.

ConocoPhillips claims PDVSA is trying to sell Citgo as part of a plan to avoid paying compensation for assets that were nationalized by Chavez in 2007. Chavez, who died last year, had vowed to never pay foreigners a dime for assets he confiscated.

John Zavitsanos, a lawyer for Citgo, said at a hearing in state court in Houston on Dec. 15 that ConocoPhillips’s request for a court order to probe Venezuela’s effort to sell Citgo may scare off any potential investors.

The increasing need to sell Citgo comes as the price for Venezuela’s oil, which accounts for 95 percent of the country’s exports, has tumbled 51 percent since March 2012 to a five-year low of $57.50 a barrel and as the economy heads for the biggest contraction since 2009. While Venezuela had $21.4 billion in international reserves on Dec. 11, the government and PDVSA have about $21 billion of debt to pay by the end of 2016.

‘Strong Incentives’

Venezuela’s bonds are still a buy to Barclays Plc, which reiterated its recommendation on Dec. 15 and said the country has the wherewithal to keep making payments.

“Venezuela has the capacity and strong incentives to avoid a default/debt restructuring,” strategists including Donato Guarino said in the report.

If Venezuela repudiates its debt, everything from oil tanks to oil receivables could be equally difficult for investors to get their hands on, Buchanan’s Fernandez said. The tanks are probably leased, with an independent financing contract assigned to each one, while oil revenue receivables may be already collateralized against other debt, he said.

“Litigation can be difficult to achieve,” Michael Ganske, who oversees $8 billion including Venezuela bonds as the head of emerging markets at Rogge Global Partners Plc, said by telephone on Dec. 12. “Investors are questioning their assumptions. It’s not a straightforward case.”

(An earlier version of this story was corrected after a Citgo lawyer was misidentified in the 19th paragraph.)

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