A US judge validated the 2020 bonds of the Venezuelan state oil company PDVSA on Thursday, temporarily putting on hold a separate auction of shares of the US parent of Citgo Petroleum.
According to Reuters, the ruling confirmed the rights of bondholders to the Houston-based refiner, one of Venezuela’s most treasured foreign assets.
Those bonds are secured by a controlling interest in Citgo and ultimately owned by Caracas-headquartered PDVSA.
Citgo could be seized by international creditors due to Venezuela’s default on the debt in 2019.
Years of legal battles
Bondholders and firms whose assets were expropriated in Venezuela have fought for years in US courts to recover claims from the country’s international holdings.
Citgo, valued at roughly $13 billion and the seventh-largest refiner in the United States, is at the centre of the conflicts.
Venezuela ceased servicing the bonds in 2019, along with other government and PDVSA debt.
Companies that lost property during the expropriations carried out by the late President Hugo Chavez eventually filed arbitration proceedings, winning awards that they are now attempting to execute against Venezuela’s foreign assets.
Sanctions and opposition control
Washington sanctioned PDVSA back in 2019 as an effort to push Maduro’s regime.
The sanctions compelled Citgo to cut ties with its parent and place the company under the control of Venezuela’s US-backed opposition.
Opposition has since tried to protect Citgo and other foreign assets from creditors. The core of its legal strategy was the assertion that PDVSA’s 2020 bonds were not valid because they had been poorly authorised under Venezuelan law.
Judge reaffirms bond validity
On Thursday, US District Judge Katherine Polk Failla of Manhattan rejected the opposition’s arguments.
She ruled that the bonds were lawfully issued, repeating her previous decision from 2020.
An appeals court remanded the initial verdict for further review, but Failla stood firm.
Her judgment had an immediate impact in Delaware, where US District Judge Leonard Stark is overseeing the court-ordered sale of Citgo’s parent company shares.
The auction was briefly halted to analyse the impact of the New York decision.
Auction and potential buyers
The Delaware auction drew 15 bids, including firms and bondholders with claims against Venezuela.
Among them are a subsidiary of Canadian miner Gold Reserve and Amber Energy, which is affiliated with Elliott Investment Management.
The hearings reached their fourth day on Thursday, with Stark still to answer several procedural questions or confirm a winning bid.
The sale’s decision is anticipated to determine the future of Citgo, a critical source of cash for Venezuela’s opposition and a possible asset for creditors demanding repayment.
According to a July court document, the initial top bid came from a Toronto-listed miner’s Gold Reserve affiliate. For years, the company has sought restitution for the expropriation of its Venezuelan interests.
But the review took a dramatic twist last month when officer Robert Pincus changed his recommendation in favour of Amber Energy, a partner of Elliott Investment Management.
In the end, Pincus deemed Amber’s $5.9 billion bid the better of the two after a late bidding war.
Amber’s offer was soon challenged by rival claimants and their lawyers, who filed motions to disqualify it.
Venezuela’s next moves
Earlier this week, Venezuelan lawyers warned that if the 2020 bonds were found to be legitimate, they would file an appeal.
Following Failla’s decision, Citgo’s oversight boards convened an emergency meeting with legal counsel to assess their options, according to a person familiar with the matter.
For the time being, Stark’s court is continuing the auction process, but the renewed vigour of bondholder claims complicates an already heated battle for Citgo.
A pivotal moment
The duelling cases in New York and Delaware highlight the stakes for Venezuela’s offshore assets, which are stuck between creditors’ demands and political measures to protect national interests.
With Citgo’s destiny hanging in the balance, Failla’s decision might alter the amount of influence bondholders and expropriation claimants ultimately have in the struggle for control of the corporation.
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