WILMINGTON, Del. (Reuters) – Citgo Petroleum may look like a tempting target for bondholders of its parent company, Venezuelan-owned oil driller PDVSA, but the refinery operator’s complex debt structure could make its assets difficult for creditors to seize, legal experts said.
As Venezuela careens closer to a default, some holders of PDVSA bonds set to expire in 2020 and backed by a pledge of Citgo stock are preparing to go to U.S. courts to foreclose on Citgo shares, according to sources familiar with the situation.
That may not be easy. Energy producer ConocoPhillips Co has gone to court alleging the pledge of 50.1 percent of Citgo stock is fraudulent, meaning the PDVSA bondholders will have a tough time getting their hands on the stock.
“Lots and lots of claimants have been circling Venezuela and PDVSA, so there is plenty of competition for every scant asset crumb, which means we should expect challenges at every turn,” said Anna Gelpern, a professor at Georgetown Law.
The battle over Houston-based Citgo, which was valued as high as $10 billion during an aborted 2014 sale process, illustrates the dearth of viable options for foreign creditors trying to collect from Venezuela.
Venezuela’s Maduro said in November he wanted to restructure all foreign debt, which includes some $60 billion in outstanding sovereign and PDVSA bonds. Private estimates put the total foreign obligations at more than $120 billion owed to creditors including Russia, China and oil service providers.
Negotiations with bondholders are almost impossible in the face of U.S. sanctions and the country has been ruled in default due to payment delays on some bonds, which for years have been a favorite of investors for their sky-high yields..
Faced with mounting concern that Venezuela will not be able to keep up the payments, some holders of around $3 billion worth of the 2020 bonds are talking to lawyers and advisers about initiating legal action to seize the Citgo stake.
Legal experts said they would face many hurdles, including Citgo’s issuance of billions of dollars of its own debt. Holders of Citgo debt could cite change-of-control provisions to demand immediate repayment if PDVSA’s bondholders got their hands on the Citgo stock, Deutsche Bank said last month in a note to clients.
“We see significant valuation risk in CITGO once the collateral collection process is triggered given potential legal challenges and other complications,” said the Nov. 27 note by strategist Hongtao Jiang.
PDVSA bondholders would also have to contend with Russian oil producer Rosneft, which has a lien on the remainder of Citgo’s stock. The lien, and the legal uncertainty hanging over Rosneft from U.S. sanctions, could undercut demand for acquiring Citgo if bondholders were to put it up for a sale, legal experts said.
Bondholders will also have to compete with other creditors who are gunning for Citgo.
“It will become a free-for-all,” said Mark Weidemaier, a professor at University of North Carolina School of Law.
One creditor of Venezuela, Crystallex International Corp, a Canadian gold miner, has already asked a federal judge in Delaware to void the stock pledge to the 2020 bondholders.
Crystallex says the pledge was a fraudulent transfer of value from Citgo, which got nothing from the stock pledge, to PDVSA. With such uncertainty hanging over the stock pledge, the bondholders will struggle to get full value for Citgo if they manage to foreclose on the shares, according to legal experts.
Crystallex has said in court papers it has reached an undisclosed settlement, which requires Crystallex to stay or withdraw its case in Delaware federal court once it begins receiving payments from Venezuela, according to court records.
But ConocoPhillips Co launched a similar action last year in the same Delaware court that also takes aim at undoing the stock pledge.
A trustee for Crystallex, which is operating in bankruptcy after Venezuela seized its mining operations, and a spokesman for ConocoPhillips declined to comment.
Finally, PDVSA could put Citgo’s U.S. holding company into U.S. Chapter 11 bankruptcy, which would prevent creditors from seizing Citgo stock, the main asset of the holding company.
However, bankruptcy can be chaotic and unpredictable and it would increase the risk that Citgo could wither during the process – a risk to both PDVSA as well as bondholders.
Richard Langberg, an analyst with S&P Global Ratings who follows Citgo, said the significant costs and uncertainty should give any creditor pause about trying to collect against Citgo.
“On a scale of one to 10,” he said of the degree of difficulty, “it’s a nine or a 10.”
Reporting by Tom Hals in Wilmington, Delaware; Editing by Noeleen Walder, Christian Plumb and Andrew Hay