Venezuela doomed to lose Citgo this month unless U.S. Treasury Department intervenes

Venezuela would lose ownership of Citgo by the end of this month, with the shares of the Texas-based refinery going to Russian state-run oil company Rosneft and to other financial backers of the U.S.-sanctioned Nicolás Maduro regime unless the U.S. Treasury intervenes, people familiar with the situation said.

The transfer of ownership would be triggered by the expected default on a $913 million Petróleos de Venezuela (PDVSA) bond issue payment coming due on Oct. 27. The bondholders would have the right to seize 50.1 percent of Citgo shares Maduro placed as collateral for the bond issue thanks to a special license to circumvent the U.S. sanctions issued by the U.S. Treasury Department that allowed U.S. bondholders to have recourse in case there was a default.

After the Treasury Department granted that license, Venezuelan interim president Juan Guaidó gained control of the company earlier this year.

The Department issued the license to hurt the regime, but now it only threatens Venezuela’s ownership of the company, seen as vital for the bankrupt country’s recovery in an era after Maduro, company insiders said.

“Either the U.S. government removes its license, in which case the bondholders cannot exercise their remedies on the collateral in question, or the bondholders, as of the 28th, have the right to sever the link between Citgo and the government of Venezuela,” a source familiar with the company’ s case told el Nuevo Herald.

“Nor the Guaidó government or the Maduro government would have the ability to control Citgo in any respect” after that date.

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The United States heads an alliance of 56 countries that recognizes Guaidó as Venezuela’s legitimate head-of-state, and has implemented stringent financial sanctions against Maduro, who still controls most of the government institutions.

The 2020 PDVSA bond issue has as collateral 50.1 percent of the company, but all the shares would be affected by a default on the 27th, since Maduro also placed the remaining 49.9 percent as collateral in a $1.5 billion loan it received from Rosneft.

“If the bondholders don’t get paid and ask for their 50.1 percent that automatically also triggers Rosneft come due and payable,” said Russ Dallen, president of investment bank Caracas Capital Markets. Given a cross-default clause inserted in the loan agreement with the Russian oil company, “if Venezuela doesn’t pay, then Rosneft would be entitled to take the other 49.9 percent of the company.”

Experts and insiders estimate there is zero chance of either the Maduro regime or Guaido’s team making the $913 million payment due on the end of the month. Citgo, a 110-year-old company bought by Venezuela in 1986, is viewed by many as key for the country to gain back access to the U.S. markets once Washington lifts the sanctions it imposed on PDVSA earlier this year.

With three refineries and 45 storage terminals, the company has a refining capacity of 749,000 barrels of oil per day and provides fuel to 5,000 U.S. service stations that carry its brand. A quarter of Citgo’s oil came from Venezuela before the sanctions were adopted.

Sources close to Guaidó feel little sympathy for the bondholders. They argue that the bondholders financed a cruel regime even though they had been warned by the democratically elected National Assembly that the transaction was illegal at the time of the issue’s launch, back in 2016.

According to the Venezuelan Constitution, the National Assembly approves contracts of national interests, not Maduro.

But while deeming it illegal, the National Assembly did authorize in April a $71 million payment belonging to the same issue that was coming due in order to avoid defaulting and losing control of Citgo at that time.

That action is viewed by some as a recognition from the Guaidó administration that the debt is legal, but the source close to the company’s case said that argument has no legal merit, at least in the U.S.

“To make an interest payment does not concede the legality of the debt, or that it could be challenged,’‘ the source said. “Making certain payments to avoid a default does not waive a legal claim that the transfer was fraudulent.”

Maduro, who at different times tried unsuccessfully to sell off Citgo, forced the company acquire billions of dollars worth of debt and to hand over the cash to the government, even before the PDVSA 2020 was launched.

The company, now under a new board named by the Guaidó’s team, has severed ties with the regime and has returned to sound practices and financial stability. That has allowed it to gain a more solid footing, and refinance this year up to 70 percent of the loans issued under the company’s own name, insiders said.

Follow Antonio María Delgado en Twitter: @DelgadoAntonioM