Venezuela: US Treasury Department Extends CITGO Protection Amid Auction Controversy

Caracas, November 9, 2024 (venezuelanalysis.com) – The US Treasury Department’s Office of Foreign Assets Control (OFAC) has extended a ban on transactions involving Venezuela’s defaulted PDVSA 2020 bond.

On Thursday, OFAC issued General License 5Q forbidding any transactions involving the debt instrument until March 7, 2025. Venezuela’s state oil company PDVSA issued the $3.4 billion bond in 2016, with 8.5 percent interest, primarily swapping prior debt close to maturing.

The bond, due to expire in 2020, included 50.1 percent of shares belonging to CITGO, PDVSA’s US-based refining subsidiary, as collateral. The PDVSA 2020 bond was deemed a priority by the Nicolás Maduro government, which continued servicing it until US sanctions made it impossible to deliver payments.

Since 2019, the US government has intervened to stop bondholders from exercising the collateral. It first stepped in to protect the political prospects of the Venezuelan self-proclaimed “interim government” led by Juan Guaidó. Washington’s recognition of the parallel administration had awarded it control over US-based assets including CITGO.

Following the “interim government”’s dissolution in early 2023, the US Treasury continued to extend the protection as CITGO became the subject of a court-mandated auction. An impending sale of the refiner would leave it up to new ownership to negotiate with the bondholders.

In October 2022, Delaware District Judge Leonard P. Stark set in motion the sale of shares belonging to PDV Holding (PDVH), CITGO’s parent company, to satisfy a number of claims against the Caribbean nation, mostly stemming from international arbitration awards.

Canadian miner Crystallex initiated the process to collect $1 billion granted by the World Bank’s ICSID court as compensation for the nationalization of a mine in Venezuela in 2008. In recent years, several other corporations managed to tag similar claims to the Delaware auction, hiking liabilities to a total of $21.3 billion. The creditors were set to collect on a “first come, first serve basis.”

Guaidó and his associates drew heavy scrutiny for their role in jeopardizing Venezuela’s US-based refiner. Their public statements and actions were used by US courts to issue so-called “alter ego” rulings, allowing companies to collect debts owed by the Venezuelan state via PDVSA and its subsidiaries. 

In September, the Delaware auction’s court-appointed Special Master Robert Pincus chose a winning bid of $7.3 billion from Amber Energy, a subsidiary of vulture hedge fund Elliott Investment Management. The CITGO ownership transfer requires US Treasury approval, though OFAC has promised a “favorable licensing policy.”

However, the sale has since been thrown into uncertainty by parallel lawsuits as some firms look to “skip the line” to collect on their owed amounts. Pincus has requested that Judge Stark bar auction creditors from pursuing compensation separately and approve a schedule that would culminate the sale in March 2025.

Furthermore, corporations have voiced opposition to the bid’s low amount. Companies at the top of the list, including Crystallex and US oil giant ConocoPhillips, have objected to the sale terms and requested that the court take action to find new bidders. Gold Reserve, one of the Delaware claimants, has reportedly pledged to submit a superior bid if it can review CITGO’s financial information.

For its part, Elliott has defended its offer, which will reportedly include financing from Barclays and Citigroup. One of the controversial points in the proposed sale involves setting up an escrow fund to negotiate with outside claimants such as the PDVSA 2020 bondholders. The process would delay payments and further reduce the total amount destined for auction creditors.

According to Bloomberg, Amber put forward an alternative proposal last week, totaling $5.3 billion but offering to pay creditors directly once the sale is final. PDVSA 2020 bondholders would be paid from a separate escrow account. Pincus will consider both offers as well as potential “top-up” bids.

Apart from the US Treasury bans, PDVSA 2020 bondholders have an added incentive to reach a settlement with Elliott or any different winning bidder. Following a July ruling, the bond’s validity is set to be relitigated in court in a process that could take years. 

Venezuela’s US-backed opposition, which controlled the National Assembly in 2016, has argued that the issued bond was not legal because it did not get the legislative body’s approval. However, analysts have pointed out weaknesses in the argument and the unlikelihood that US courts would invalidate a debt instrument retroactively.

Valued at $11-13 billion, CITGO owns refineries in Illinois, Louisiana and Texas with a combined processing capacity of 769,000 barrels per day (bpd). It additionally owns pipelines and more than 4,000 service stations, mostly on the US east coast.

The Venezuelan government has branded the prospective loss of its most valuable foreign asset as “the theft of the century.”

Amended on Nov. 11 to include Elliott’s alternative bid.