Venezuelan Opposition Files Lawsuit Attacking Citgo-Backed Bonds

Andrew Scurria. Wall Street Journal. October 29, 2019

Venezuela’s opposition government escalated its efforts to protect Citgo Petroleum Corp. from seizure, seeking a U.S. court order erasing bondholders’ collateral rights over the state-owned refiner and invalidating $1.7 billion in debt.

U.S.-backed opposition leaders filed a lawsuit in the U.S. District Court in New York on Tuesday claiming that bonds backed by the Houston-based, Venezuelan-owned refiner were issued illegally under President Nicolás Maduro and can’t be enforced.

The complaint marks the most direct confrontation yet between the country’s bondholders and opposition forces led by Juan Guaidó, who has tried for months to seize political power in Caracas.

The bonds, issued in a 2016 debt swap by state oil giant Petróleos de Venezuela SA, have clouded Citgo’s future as a Venezuelan asset. They were secured by a 50.1% stake in Citgo, potentially enabling bondholders to wrest control of the company if they weren’t paid.

At the urging of Mr. Guaidó’s opposition, the Trump administration last week extended a three-month shield over Citgo, preventing creditors from transferring and auctioning the shares through Jan. 22. With Citgo temporarily safe from seizure, the PdVSA bondholders weren’t paid $913 million they were owed on Monday.

Tuesday’s complaint said the PdVSA bonds are “null and void” because they were issued without the approval of Venezuela’s opposition-controlled legislature, the National Assembly. Creditors provided Mr. Maduro with “a financial and political lifeline,” knowing the bonds were questionable, according to the complaint.

Bondholders include Ashmore Group PLC, BlackRock Financial Management Inc. and Contrarian Capital Management LLC. A spokesperson for the bondholders wasn’t immediately available for comment.

Representatives for Mr. Maduro couldn’t immediately be reached for comment.

As Venezuela’s largest asset in the U.S., Citgo is a natural target for creditors that have grown impatient during Venezuela’s long economic meltdown. In addition to bondholders, multinational companies are also circling Citgo, viewing its valuable Gulf Coast refineries as possible compensation for assets in Venezuela that were expropriated under socialist rule.

There isn’t nearly enough of Citgo to go around, sparking a race among creditors to lay claim to the company.

The Venezuelan opposition has asked for permanent protection for Citgo, arguing that losing the company to creditors would discredit Mr. Maduro’s political rivals and undermine U.S. efforts to oust him from power. Members of Congress from Gulf Coast states have also urged the Trump administration to intervene on the company’s behalf.

With U.S. support, Mr. Guaidó and his allies took over Citgo’s boardroom in February, installed directors friendly to the opposition government and severed the company’s ties with its owner, PdVSA. The takeover delivered a potential revenue source to the opposition but meant payments on the Citgo-backed bonds were its responsibility to make.

The U.S. Treasury Department has said it would look favorably on a potential deal to restructure the debt. Citgo has considered bankruptcy as one option for sorting out claims on its assets if creditors closed in, The Wall Street Journal has reported.