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Q&A: Is Venezuela on the verge of losing its prized foreign asset, Citgo?

Q&A: Is Venezuela on the verge of losing its prized foreign asset, Citgo?

The final stages of a U.S.-court-organized auction for shares in Citgo Petroleum, the Venezuelan-owned parent company, have been reached. Bidders are submitting better offers and creditors hope to recover some of the proceeds.

The auction is a result of a case Crystallex, a Canadian miner, filed in Delaware eight years ago against Venezuela. Citgo Holding's parent company, PDV Holding was found liable by the court for Venezuela's expropriations and debts. This allowed over a dozen creditors to seek compensation for nearly $19 billion.

The auction, despite delays, has moved forward, particularly since last year. This is because there have been two rounds of bidding. In March, Red Tree Investment's $3.7 billion bid was chosen as the starting bid. Rivals are now challenging this offer.

Red Tree is not the only company competing for better bids. A consortium that includes Gold Reserve, Rusoro Mining and Koch, as well as a trading house, Vitol are also in competition.

According to a source with knowledge of the matter, Elliott Investment Management affiliate Amber Energy also considers whether or not to make a bid following a court ruling that favored a potential offer.

The court officer who oversees the auction and said last month that new bidders might emerge just before the June 18 deadline for submitting offers must recommend the winner of the auction by July 2. A final hearing is expected on August 18 with the judge and all parties involved.

What could be the possible loss for Venezuela?

Venezuela would lose its largest overseas asset if it fails to retain equity in the refinery and its U.S. parent companies. With a foreign debt of $150 billion, the country has already lost assets in Europe, Asia and elsewhere to creditors.

Leonard Stark, a Delaware judge, has allowed parties representing Venezuela the opportunity to make an offer. The boards that supervise the seventh largest U.S. refinery would have to get the backing of politicians from both Washington and Caracas, a difficult task given the U.S. sanctions against the OPEC nation.

Prior to the sanctions, Citgo's 807,000-barrel-per-day refining network was a primary processor of Venezuela's heavy sour crudes. Citgo's 2019 break with its ultimate parent company, Caracas based PDVSA has left Venezuela struggling to find new markets. The Houston-based refiner, on the other hand, has been sourcing crude from different suppliers.

Venezuela's opposition worked tirelessly for years to keep Citgo, funding legal defenses as well as lobbying Washington. Treasury Department must approve the winner of the auction. Treasury Department has protected Citgo in recent years from creditors.

Citgo, according to opponents of Venezuelan president Nicolas Maduro, could help the nation's economy recover if democracy was restored. Maduro officials rejected U.S. sanction and called the auction "robbery".

Can creditors claim post-auction compensation?

Yes. Yes.

If they are not satisfied with the results, creditors who rejected the result of the bidding round in the past due to the conditions set by the winner can file objections. They can also pursue parallel cases in U.S. court.

Three of the original 18 creditors cleared by the court have withdrawn due to mounting legal fees and uncertain prospects for recovery. Other participants, such as the owner of artifacts belonging to Venezuelan independence hero Simon Bolivar and a collector of Bolivar-related items, failed to meet all requirements set by the court.

All creditors will be compensated

Unlikely. Citgo's value was between $11 billion to $13 billion in the Delaware case. However, the auction is expected to yield less than $8 billion when you factor in possible side agreements with important creditors like bondholders.

Citgo's recent poor performance, which includes a profit that dropped to $305 millions last year, from $2 billion by 2023, will also affect its valuation.

This suggests that over half of the registered creditors who collectively claim $18,9 billion may not receive any distributions.

(source: Reuters)