Photographer: Carlos Becerra/Bloomberg

Citgo Threats in Focus as Bond Investors Dodge Venezuela Chaos

  • Mounting U.S. sanctions could expand crisis-related risks
  • More than a dozen lawsuits put U.S. assets in crosshairs

Amid the political and economic crisis in Venezuela, Citgo Holding has been a bright spot for investors. But the outlook is clouding with the prospect of new U.S. sanctions that would limit oil imports and lawsuits that could upend its ownership structure.

Debt issued by Citgo, which is owned by state oil company Petroleos de Venezuela SA and is the largest U.S. importer of Venezuelan oil, has held on to its value throughout the meltdown in other assets linked to the country. The refiner’s bonds are trading well above par even as a default by the parent becomes increasingly likely.

Citgo’s insulation from the chaos that sent Venezuela’s sovereign debt tumbling more than 12 percent last month all comes down to a matter of fine print. Covenants on Citgo’s bonds and loans protect it in many ways from a default or bankruptcy at PDVSA, and guarantee a set payout if its ownership changes hands. But it’s hard to completely separate the refiner from its parent, especially after PDVSA pledged a stake in Citgo as collateral on its notes. And Citgo investors are increasingly wondering what it all means for them.

“Especially after Citgo was named in recent lawsuits against PDVSA, investors have been asking if it could be dragged into the process if PDVSA pursued bankruptcy,” said Richard Langberg, who covers Citgo and its parent company as an analyst at S&P Global Ratings and says client inquiries about the oil refiner’s bonds shot up in the past few weeks.

Officials at Citgo and PDVSA didn’t respond to requests for comment.

Langberg tells callers their bonds are fairly well protected against the turmoil.

“Citgo is an insulated subsidiary of PDVSA,” Langberg said in an interview. Under S&P criteria, “that means that it’s unlikely to be drawn into a PDVSA bankruptcy.”

But others aren’t so sure. Here’s a look at three potential scenarios and what the impact could be.

1) U.S. bans imports of Venezuelan oil

After President Nicolas Maduro held an election July 30 that served to consolidate his power, the U.S. froze overseas accounts of members of his administration, forbid trading in new debt issued by the government and banned Citgo from repatriating any funds to Venezuela. The Trump administration has also prepared a menu of possible additional sanctions, including prohibiting oil shipments to the U.S.

People line up to cast their ballots in Caracas on July 30.

Photographer: Ronaldo Schemidt/AFP via Getty Images

Moody’s Investors Service said a move targeting oil could “hasten a default” on Venezuela’s sovereign debt and would hurt, but not disrupt, operations at Citgo.

Francisco Rodriguez, the chief economist at Venezuela-focused broker-dealer Torino Capital, has a mixed view on what it could mean for Citgo.

“Sanctions could make Citgo a much more difficult company to operate,” Rodriguez said.

On the other hand, he said, the sanctions could ultimately force Venezuela to sell Citgo. If it ends up in the hands of a new owner, “it might actually become a better company,” he said.

Meanwhile, Citigroup Inc. strategists led by Donato Guarino say the standoff won’t likely extend to include an oil blockade given the risks such a move would hurt the Venezuelan people as well as the U.S. companies that rely on the shipments.

“The costs are too high for both parties,” Guarino and his team wrote in an August report. 

2) Companies that won cases against Venezuela go after PDVSA

Bondholders aren’t the only ones seeking payments from PDVSA. Companies that have won lawsuits against Venezuela in recent years are putting the oil producer in their sights.

More than a dozen global corporations including Exxon Mobil Corp. and ConocoPhillips have sued Venezuela after their assets were expropriated without compensation. Several have won arbitration awards, but are unable to collect since Venezuela, under sovereign immunity laws in the U.S., can’t be forced to pay.

Canadian miner Crystallex International Corp. took the efforts a step further this month when it asked a Delaware judge to grant it shares in PDV Holding Inc., the parent of Citgo Holding and Citgo Petroleum, to satisfy its $1.4 billion award.

The strategy requires that Crystallex prove Venezuela and its oil company are essentially one entity. If Crystallex succeeds, other companies are sure to repeat its strategy, saddling the Citgo parent with billions more in obligations that rank senior to bondholders’ claims.

Siobhan Morden, the head of Latin America fixed income strategy at Nomura Securities International, says it’s likely any claims against PDV Holdings will be rejected. Regardless, the legal case could take years, negating any impact on holders of bonds due before then.

A new sanction announced last week banning dividend payments from Citgo to its parent in Caracas even boosts liquidity for Citgo, according to Jorge Piedrahita, the chief executive officer of Gear Capital Partners in New York.

“The Citgo dividends are now trapped in U.S. jurisdiction,” Piedrahita said.

3) PDVSA defaults on debt backed by stake in Citgo’s U.S. parent

When PDVSA came up against a $5.325 billion payment it couldn’t make in October 2016, it practically begged bondholders to swap the notes for new maturities due 2020. About half agreed, but the price PDVSA paid was steep: To push the deal through, it pledged a 50.1% stake in Citgo Holding as collateral on the new bonds. 

If PDVSA defaults on those 2020 bonds, noteholders could theoretically move to seize ownership of Citgo Holding.

The entity would still have to honor all outstanding debt. New ownership could possibly also trigger change-of-control rights for Citgo Holding and Citgo Petroleum bonds, requiring the company to offer to immediately repay them at 101 cents on the dollar. (Of course, with the bonds currently trading above 101, holders are unlikely to exercise that right.)

If they did, though, it could put Citgo on the hook for billions of dollars. Should the company be unable to come up with the money, it would be in a jam.

“I don’t think they have the cash at hand, so my sense is they would try to restructure the debt in some orderly fashion,” said Diego Ferro, the co-chief investment officer at Greylock Capital Management, which specializes in distressed and high-yield assets and owns Venezuelan debt.

— With assistance by Maria Valero

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