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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  1. Because Rosneft quietly picked-up a 49% interest in Citgo AFTER the Trump election, you can bet that this story will eventually make some big headlines in the states. Just watch. Moscow hotel hookers/Trump/ kompromat/Putin/elections/hackers. Citgo is going to be the next big national news story.

    • Rosneft may secretly be in control of the bonds giving them majority control of Citgo U.S. operations. This is a very complicated issue and one of the reasons why Rex Tillerson was recommended as Secretary of State. The Ruskies have positioned themselves very well having known for some time what we want from them vis-a-vis North Korea, Iran and radical Islam. Others are also positioning themselves like the chap Rodil featured by Bloomberg. The Ruskies also making their moves with Cuba. The Russians want access to U.S. markets, however they are prepared to dump Citgo. The top Venezuela priority for the incoming U.S. administration is securing the release of American hostage Joshua Holt. Nothing happens without this release. It really gets complicated because Josh was captured for Cilia’s nephews and they are not going to free Josh just like that. There is a reason why the sentencing delayed until the new admin has settled in.

      Regarding everything else with Venezuela, forget it. We are not going to go to war with Venezuela unless you give us a good reason and you are not. Tareck is there to make sure that we don’t have a reason. Tareck is there to make sure there are no lone wolves like the Hezbollah nuthead in 2006. Tareck is there to make sure there are no links to Iran, Hezbollah and everything else. Sailing under the radar is what these guys do.

  2. I know this is already a for Dummies version of a very complicated set of financial operations, but I don’t see myself explaining this to my dad (who is still in Venezuela) and being successful.

    Any opinions on how to get this information to the general public?
    Probably it’s easier to tell my dad: “Trust me, it’s as bad as never before”

    • Dear Kami,
      I agree on your view. I’ll try to assemble a simplified, Spanish-version of this piece when possible. The main point here (a a way to explain this) is this:

      1. The random expropiations of the Chavez era are now coming to roost, and we owe several billions of dollars we don’t have.

      2. The foreign companies are going after the last remaining assets of the Republic abroad, and CITGO is the crown jewel of these.

      3. PDVSA cunningly, and without regards to future viability, has done several operations to suck as much value as possible out of CITGO.

      4. This is making the multinationals angry AF, and they’re now going against the country with everything they got in court.

      5. None of this is gonna be good for the country.

  3. I find this article on the cynical side. Creditors of PDVSA are defined as “vultures”. The central issue, that of PDVSA’ s managerial irresponsibility, is glossed over in favor of mentioning the good points of the defense being put up by PDVSA. The central issue about PDVSA’ s mess remains untouched, that PDVSA is managed by a gang of gangsters who should not be lionized.
    This is not the time to be cute.

    • Gustavo, agreed 100%, I was going to comment something similar earlier, but desisted, due to incipient rumors of new phone taps (mine was “tested” several times this A. M.-first time ever), and probable forthcoming internet monitoring/sanctions. So, a “vulture” is someone/entity trying to seek legal indemnification for property illegally-seized by a crooked Government. Same for “vulture funds”, willing to legally risk their/investors’ money investing in securities beaten down in market price due to irresponsible/often thieving issuers.

    • Gustavo, I understand your point and concerns. I believe my independence and objectivity has been sufficiently presented in my previous pieces. On this subject, I sought to be specific on the topic at hand (CITGO fraudulent transfer suits). This is definitely a more complex issue with A LOT of background that this post never meant to cover.

      My opinion on this subject stands. I believe the case for a fraudulent transfer is rather thin, despite the fact that the companies indeed were expropiated unlawfully back in the day. Perhaps I should have used more serious terms and abstain from calling them ‘vultures’. Point taken.

      • If it looks, acts and behaves like a vulture, why not call it a vulture? Vultures have an important purpose that entities that function as vultures should be described as such. So long as the description is accurate I would commend the use of the term. Making an article as dry as toast because someone does not care for the term doesn’t advance the cause of describing the flavor of the situation.

  4. Gustavo “Spot On” regarding – Vultures when creditors come calling when a debt is due…Everyone is a victim. Pobrecito…. le fueron a pasar la factura.

  5. Wow, I was going to comment on “Vultures” as well, not in its use in the article, but that it was directed at the WRONG PARTY. It is the Government of Venezuela, that is eating what is left of its own carcass. Seems they have devoured all 100%

  6. No problem, Daniel. I just felt I should raise a red flag. As Dale says the vultures are in La Campiña (PDVSA headquarters) and in Miraflores

  7. Wish we could get “man on the street” type posts on this website, instead of wonky economics stuff like this. No offense, Daniel; you write well.

  8. The term vulture is applied to speculators who buy high risk bonds at a very low price and when the debtor defaults seek to collect the full price in order to obtain a very high arbitrage profit using all legal means at its disposal to extort from the debtor payment terms which it cannot pay and which regular bond holders are willing to concede, they seek not mere compensation for their loss , but an enhanced profit from forcing the debtor to pay the full price which it never had to pay in the first place.

    Where the payment terms they extort from the debtor country are such as to prevent its people from scaping deep misery and starvation then there are those who quibble about the morality of their actions even if they make use of lawful means to achieve a maximum profit from their transactions …!! .

  9. The Vultures as you call them are people that are willing to eliminate risk for the bondholders and let them recoup some value on what may become worthless paper. Argentina tried that approach and in the end had to pay.
    The Venezuelan government that the people elected made these commitments. The money from selling the bonds went to Venezuela. Chavez and Maduro have stolen from the people of Venezuela. That is an internal issue and should not be the bondholders loss.
    I think any way that you look at this, Venezuela has lost Citgo.
    The only way forward for Venezuela is foreign investment. The technical knowledge, money and ability to restore the Venezuelan oil industry is held by US companies. The US companies are owed billions of Dollars for work already performed and have reduced their Venezuelan operations substantially.
    Chavez and Maduro have destroyed the trust needed for US companies to invest the billions of Dollars that the oil industry desperately needs. There is no good news on the horizon until there is a change of government.
    Venezuela will default. There are no more assets left to mortgage. Maduro’s last begging trip around the world did not generate new loans. Without new investment, Venezuelan production will continue to decline. As production declines there will be less money for maintenance and conditions will keep deteriorating.
    This is an awful scenario for the people of Venezuela. The government’s refusal to allow aid into the country and decreasing funds available for imports will result in more and more suffering.

  10. the inmoral conduct of the govt that issued these bonds does not excuse the inmorality of what the vultures do , they monetize peoples suffering , for them its business as usual of course , If you went to a bankrupcy court in an OECD country the bankrupt business would get a better deal than vultures allow a bankrupt country,and for them its not a question of avoiding a loss but a question of making a huge profit from an arbitrage transaction …… !! Peoples suffering and starvation is none of the vultures busines because its all the corrupt govt fault …..!! if the law allows you to extort the system to maximize your gain then you go for it regardless of the consequences …!!

    Reminds me of the advise I gave a friend who gave a loan to a person of low repute against the ownership transfer of a land lot in Maracaibo, When the loan went unpaid, the land lot price had risen very high in value and could be sold at a big profit , much greater than the amount of the loan, My friend told me ..Im thinking of selling the lot and keeping the whole price for myself , The other guy is a crook and would have done the same to me ..I replied that he wasnt the crook but himself so he should act as his conscience told him. He tought about it and decided to sell the land, pocket what he was owed and give his debtor the difference, he felt good about what he did and the debtor was not just grateful but found a new grounds for making himself a better man.

    It reminds one of Shylock and his pound of flesh!! Its a sorry thing when someone gleefully tries to glamorize his greed ….!!, you can take your debtor to the cleaners but you dont have to skin him alive…..!!and then feel unctuously righteously proud of the cruelty you ve inflicted !!

    They already tried to sell Citgo and the offers were paltry , not enought to cover 10% of what Pdvsa owes its huge number of creditors , people dont understand that Citgo is worth something not as a set of assets but as business which is structured in a particular way to for someone to buy it at a profit its operations have to dovetail with those which the buyer has and they dont always allow for a good fit …!!

    As already mentioned ,if a new regime replaces our current one , then it has to have some basis to restore the country economy and oil industry to what it once was , and leaving it bereft of any resources will just make repayment impossible …so some degree of caution is warranted …!!

    • exactly right!!!

      just because our side is nefarious doesn’t make the other party angelic

      they ARE vultures, they have a bloody track record (too!)

      amén bill bass amén

  11. For the Obama lovers, SecState Kerry proved disastrous for Venezuela. You have no idea. Kerry actually wanted to visit Venezuela and had to be talked out of it. How the fuck do you dare visit a country that kidnaps and holds American hostages? Where you planning on bringing the kid back home? No, you do not give a rat’s ass about him. Good riddance to John Kerry. For the unitiated, Kerry became a dick during Vietnam.


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