News hit the tape this week that PDVSA is in legal trouble. Again.

The state oil company is being challenged in US courts by US-based ConocoPhillips over its latest financing operation: a $1,5Bn loan from Rosneft, backed by 49.9% of Citgo Holding’s equity. The other 50.1%, if you’ll recall, was posted as collateral for the swap of PDVSA 2017 bonds that took place last October, and Conoco cried fraud on that deal as well, even before it came through.

Canadian gold-miner Crystallex has also put their army of lawyers to work, but with a different approach. They are coming after everybody: PDVSA, PDV Holding Inc., Rosneft Trading and collateral agent GLAS Americas LLC were listed as defendants in the latest suit, which comes on top of a dispute against the collateral packaged with the PDVSA 2020s (swap) bonds.

What’s their case? And why are they targeting Citgo, specifically?

Citgo Holding Inc. is far and away the most valuable of these, both because of its strategic relevance for the refining and marketing of Venezuelan crude in North America, and because it’s the direct owner of Venezuela’s hard assets in the US.

Back in 2013, the World Bank’s Arbitration Panel, ICSID, awarded big money settlements to Conoco. Last year, Crystallex got a similar award. (This was compensation for the seizure of their Venezuelan operations back during Chávez’s Exprópiese phase.) Those awards ought to have been paid by the Republic, but since the central bank is quickly running out of international reserves, companies are starting to think they’ll have to call the Repo Man and get a hold of whatever assets the Venezuelan state has in the U.S. The most valuable and reachable of which is clearly Citgo or, more specifically, its holding company.

Citgo Holding Inc. is far and away the most valuable of these, both because of its strategic relevance for the refining and marketing of Venezuelan crude in North America, and because it’s the direct owner of Venezuela’s hard assets in the US: the refineries, pipelines, terminals, etc. So it makes sense that these companies would try an eye-for-an-eye to compensate for their expropriations.

One little caveat: the people at PDVSA are no fools. Being short on cash as crude prices nosedived in 2014, and after playing out the implications of this scenario, the company sought to transfer as much value out of CITGO as possible. At the end of that year, they issued a $650mm bond due in 2022 backed by Citgo Petroleum’s assets (among these, refineries and accounts receivable) and transferred more than half of proceeds to PDVSA as a special dividend.

(“Citgo Petroleum”, to be clear, is the operating arm of the holding company. It owns the three refineries – located in Lemont, IL, Corpus Christi, TX, and Lake Charles, LA – and operates the web of service stations throughout the States. But it doesn’t own the infrastructure of ‘midstream’ pipelines and oil terminals: those, in legal terms, are owned by other companies that, in turn, are owned by Citgo Holding.)

The second bite came in February of 2015: Citgo Holding Inc. issued a $1.5Bn 2020 note and a $1.3Bn loan backed by a 100% equity stake on Citgo Petroleum (ie. any value left after paying off the owners of the $650mm bond and other loans outstanding) and midstream assets. In a similar manner, the main purpose of the new debt was to funnel cash to the parent company.

These issuances were done relatively by-the-book, including negotiations with potential creditors that led to Citgo agreeing to several covenants in order to proceed. Basically, covenants are clauses in bond contracts that stipulate the things the debtor can or cannot do when managing its finances, and its purpose is to rein in excessive buildups of debt or any action whatsoever against the interests of creditors. Partly because of the restraining nature of these clauses, and partly because the case for deeming these transfers ‘fraudulent’ was a bit thin still, Crystallex got its initial lawsuit against the Citgo 2020 bond issue dismissed.

PDVSA wasn’t done, of course. You know the story by now: 2016 came by, oil prices crashed below $30, PDVSA and the Republic sought any source of liquidity they could; and finally, all 100% of Citgo Holding’s equity was put up as collateral in the two financial Hail Marys at the heart of the current legal spat.

Ok, back to the sh*tstorm. Crystallex and ConocoPhillips base their cases on what they call ‘fraudulent transfer’. En dos platos, they argue that PDVSA couldn’t pawn Citgo shares to get new loans, because they freakin’ own it, goddamnit. They feel like the Venezuelans are ripping them off, because the only thing left that’s worth something is the one that’s being given away to the Ruskies and the Forks. Granted, the collateral is triggered only if PDVSA defaults, but even if it doesn’t, the offer means the assets are not not available for liquidation until the debts are paid off. Currently, shares of Citgo Holding Inc. are held in an escrow account managed by a collateral agent (GLAS Americas LLC;) that will only release the shares when PDVSA defaults, and the collateral is liquidated; or when PDVSA pays off the bond and the loan in full, and the collateral returns to PDVSA’s hands.

The situation is not that simple, though, and I think PDVSA has a decent defense. For one thing, the accusing companies are owed compensation by the Republic of Venezuela, not the US-based subsidiary of a company owned by the Republic of Venezuela, which ni es lo mismo ni es igual. In order to substantiate their case, they need to prove that Citgo Holding is an ‘alter-ego’ of Miraflores, and hence their assets are the Republic’s as well.

Second, knowing who has dibs on Citgo is not that straightforward: they consider their awards to be due and payable since ICSID ruled in their favour before the collateralization, but given that we are not yet in the ‘Final Award’ phase (when the exact amount of the compensation is revealed and the Republic is given 30 days to hand over the cash to avoid a default event), an argument can be made that they are not first in line to collect on Citgo.

So these cases could go either way; if anything it looks like an uphill climb for the plaintiffs.

Lastly, is there any specific covenant that forbids PDVSA from posting Citgo Holding’s shares as collateral? I’m no expert, but I can’t find any. Payment Ranks in the bond’s prospectuses specify that the bonds we mentioned above will be first in line to be paid, and the equity of Citgo Holding will only be worth the residual value of the Co.’s assets net of the liabilities. But the legal framework does allow for such an operation.

So these cases could go either way; if anything it looks like an uphill climb for the plaintiffs. What’s clear is that everyone in this netherworld is working on the assumption that the Republic’s broke, that default is a when-not-if event, and the only thing worth fighting for now is the carcass. Cuz that’s the thing we never stop to consider about vultures: if they’re going after you, it’s because you got a Chronicle of a Death Foretold written all over your face.

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