Keeping Citgo in PDVSA’s hands

Venezuela’s flurry of nationalizations in recent years has opened the country to the likelihood that at some point, it will lose its biggest overseas asset, Citgo Petroleum Corp. The country is facing 10 of the 129 pending suits at the International Center for Settlement of Investment Disputes, a branch of the World Bank that handles some international arbitration proceedings. Plaintiffs range from Infinito Gold, a tiny Canadian mining company that claims to have been cheated out of the Las Cristinas gold deposit in Bolivar state to Exxon Mobil Corp., the biggest publicly listed company in the United States, which claims to have lost billions of dollars in assets and future profits when Venezuela demanded control of an oil production, refining and export project in the Orinoco Belt. Exxon couldn’t come to acceptable terms, walked away from the country and filed for arbitration. The most recent cases are from Tidewater and Exterran of the U.S., both of which had assets seized a year ago when Chavez decided that crucial services such as maritime activity on Lake Maracaibo or natural-gas injection in eastern Venezuela should also be property of the state. If any of these plaintiffs prevail, they will be able to go to U.S. court and demand the handover of parts of Citgo, a unit of Petroleos de Venezuela SA, on the basis that it is property of the Bolivarian Republic of Venezuela and should be used to settle the debt from arbitration.

For them, grabbing Citgo will be less useful, however, if the unit is in debt. Anyone who grabs the refineries will have a useful asset with very little value. It will come with an obligation to pay debt to bondholders and few profits. Citgo’s maintenance and environmental standards are open questions. (Some workers there say things are as good as ever, while the U.S. government has cracked down on both environmental and worker safety violations at the company’s refineries in recent years. It’s unclear if this is because of politics, real problems, or something else.) It’s a standard anti-takeover scheme – spend the cash, borrow money, let maintenance slide a bit. Suddenly nobody wants to buy the company.

And surprise: After PDVSA President Rafael Ramirez insisted as little as a month ago that his company wouldn’t issue bonds this year, Citgo is borrowing $1.5 billion from the public in a bond auction. The notes will mature in 2017 and 2020. Citgo needs the money to pay for an upcoming investment program and to pay off debt, according to a solicitude I saw today.

The security being offered to bond-purchasers is a “first lien” on Citgo’s three refineries, inventory, its partial stake in other facilities such as pipelines, and “other assets.” I’m no lawyer, but as I understand it, this will put bondholders head to head with companies that win arbitration claims and want to grab the assets.

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11 thoughts on “Keeping Citgo in PDVSA’s hands

  1. HalfEmpty

    Infinito Gold, a tiny Canadian mining company

    i c wut u did thar

    Also would PDVSA keep moving oil to the US if their refineries were removed? My very weak understanding of these things is that those assets are very much geared to PDVSA crude.

  2. Quico

    I’m not quite sure. Seems to me the arbitrators could order Citgo’s assets seized without ordering Citgo’s ownership seized. After all, if I fall behind on my car payments and the repo man comes to take it back, he just takes the car, he doesn’t have to take my credit card debt along with it.

    ¿no?

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  4. sapitosetty Post author

    Quico, these are bonds with a first lien on a property — that is to say, a first mortgage. In the case of an attempted seizure, the lender says “hey wait a minute, you can’t seize that, it’s not PDVSA’s, it’s mine.” This is especially powerful when the mortgage lender is a big international bank with lawyers with nice shoes.

  5. Noel Maurer

    The legality is tricky. In theory, the arbitration claims would trump the claims of other creditors. If a judge agreed that Citgo was trying to (in effect) hide assets by issuing mortgage bonds, then the bonds would be voided.

    In other words, your post is spot on: it would put the bondholders head-to-head with other claimants, and slow down the legal proceedings. That said, the effect shouldn’t be exaggerated: private parties try to shield themselves in just this way all the time, and the law is pretty well developed to deal with it.

    Great blog, by the way.

  6. Marcus

    In effect, they are selling Citgo. They are just not sure (and don’t care) to whom.

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  9. Are Hvalbye

    Very interesting topic on international economics and energy politics.

    What kind of financial terms did PDVSA/Citgo have to settle with on the bond issue? Seeing an apparent controversy in regards to the pledge cause (refinery lien), investors ought to demand satisfactorily interest compensation. No?

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