Venezuela cred­i­tors eye oil as­sets in bat­tle over un­paid debt

State-owned PDVSA and re­finer Citgo are tar­gets as court rul­ings prompt show of force

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY GIDEON LONG IN BOGOTÁ AND JOHN PAUL RATHBONE, FI­NAN­CIAL TIMES COR­RE­SPON­DENT Ad­di­tional re­port­ing by Robin Wig­glesworth in New York

As Venezuela and its state-owned oil firm PDVSA lurch from cri­sis to cri­sis, de­faulted cred­i­tors are jock­ey­ing for po­si­tion to en­sure they are among the first to re­ceive cash when pay­day even­tu­ally comes

As Venezuela and its state-owned oil firm PDVSA lurch from cri­sis to cri­sis, de­faulted cred­i­tors are jock­ey­ing for po­si­tion to en­sure they are among the first to re­ceive cash when pay­day even­tu­ally comes.

The Opec coun­try is es­sen­tially bank­rupt and cred­i­tors are in­creas­ingly chas­ing its oil as­sets with their big­gest tar­get be­ing Citgo, the Hous­ton-based oil re­finer that pro­cesses Venezue­lan crude oil and is es­ti­mated to be worth roughly $4bn.

Next in their sights is seiz­ing Venezue­lan oil car­goes at sea, as US hedge fund El­liott Man­age­ment did with an Ar­gen­tine ship in 2012 af­ter it won a US court rul­ing to col­lect on un­paid debts. Venezuela is re­port­edly trans­fer­ring oil car­goes in safe har­bours in­clud­ing Cuba to avoid such risks.

The shift in cred­i­tor strat­egy is a show of force by the pri­vate sec­tor against the regime of Pres­i­dent Ni­colás Maduro, which is over­due on $5.7bn of debt pay­ments.

Al­though Mr Maduro sur­vived an as­sas­si­na­tion at­tempt this month, is wrestling with an econ­omy wracked by hy­per­in­fla­tion, and faces a se­ries of gov­ern­ment sanc­tions by the US, Europe, Canada and Latin Amer­ica’s big­gest coun­tries, he also ap­pears to have sealed his po­lit­i­cal con­trol over the coun­try.

The lat­est win for cred­i­tors came last week, how­ever, when Cana­dian min­ing com­pany Crys­tallex won a key bat­tle in its at­tempts to force Venezuela to pay $1.4bn in com­pen­sa­tion for ex­pro­pri­a­tion of a min­ing project.

A US judge ac­cepted Crys­tallex’s ar­gu­ment that PDVSA is an “al­ter ego” of the Venezue­lan state and that there­fore the Cana­dian miner has the right to seize PDVSA as­sets in the US. The rul­ing could serve as a prece­dent.

“This judg­ment . . . is un­am­bigu­ously neg­a­tive for Venezuela, given its loss of an as­set of sig­nif­i­cant value,” said Fran­cisco Ro­driguez, chief economist of Torino Cap­i­tal, a bou­tique ad­vi­sory. He added that “in all like­li­hood” the rul­ing would spur “cred­i­tors to at­tempt to pur­sue PDVSA as­sets”.

Cono­coPhillips has al­ready done just that. In April, af­ter it won a $2bn ar­bi­tra­tion award against PDVSA from the In­ter­na­tional Cham­ber of Com­merce, the US oil ma­jor seized the com­pany’s as­sets in the Caribbean.

The seizures left PDVSA with­out ac­cess to fa­cil­i­ties that process al­most a quar­ter of Venezuela’s oil ex­ports. To avoid the risk of other as­sets be­ing taken, PDVSA asked its cus­tomers to load oil from its an­chored ves­sels act­ing as float­ing stor­age units, Reuters has re­ported.

Conoco’s fight for re­im­burse­ment, though, looks straight­for­ward com­pared with that of Crys­tallex, which in­volves tak­ing on PDVSA, ri­val bond­hold­ers and the Rus­sian oil group Ros­neft.

Two years ago, half of Citgo was pledged as se­cu­rity for more than $3bn of PDVSA bonds. The other half was then pledged as col­lat­eral against a $1.5bn loan from Ros­neft. As Citgo is worth roughly $4bn, ac­cord­ing to es­ti­mates by Torino Cap­i­tal, a US in­vest­ment bank, it may have lit­tle resid­ual value left to meet Crys­tallex’s $1.4bn claim.

Such com­pli­ca­tions mean that while both the Crys­tallex and Conoco rul­ings are sig­nif­i­cant, they are un­likely to spark an im­me­di­ate whole­sale plun­der of other PDVSA as­sets.

“The rul­ing is a win for Crys­tallex, no doubt. But I’m not con­vinced that it im­me­di­ately . . . marks a tip­ping point,” said Robert Kahn, a pro­fes­sor at the Amer­i­can Univer­sity and a former In­ter­na­tional Mon­e­tary Fund of­fi­cial.

Lawyers agree. “[The Crys­tallex rul­ing] doesn’t mean that ev­ery Repub­lic of Venezuela bond­holder can au­to­mat­i­cally as­sume that

PDVSA as­sets are avail­able to them,” said Richard Cooper, se­nior part­ner at New York law firm Cleary Got­tlieb Steen & Hamil­ton.

Venezuela, which owes $31bn of sov­er­eign bonds and $28bn of PDVSA bonds, also owes bil­lions of dol­lars to China and Rus­sia, but its sole for­eignex­change gen­er­at­ing in­dus­try is in steep de­cline. Oil out­put has dropped be­low 1.3m bar­rels per day — back to 1947 lev­els, ac­cord­ing to Cara­cas Cap­i­tal.

Two years ago, half of Citgo was pledged as se­cu­rity for more than $3bn of PDVSA bonds

Venezuela’s oil min­is­ter and pres­i­dent of the Venezue­lan state oil com­pany PDVSA Manuel Quevedo (cen­tre) at a news con­fer­ence in Cara­cas ear­lier this month © Reuters

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