Caracas to leverage Citgo despite takeover risk

OREANDA-NEWS. Venezuelan state-owned PdV has shelved a plan to sell its US downstream subsidiary Citgo in favor of a \$2.5bn debt issuance that pledges US refineries as collateral in the event of an increasingly likely credit default.

The new strategy is driven by the government's urgent need for cash and concerns that a sale would get bogged down by US regulators and US courts, according to Venezuelan energy ministry officials and financial sector executives.

But Caracas is growing resigned with the prospect that it could lose Citgo altogether if the government defaults on its debt, executives said.

The government "knows it's going to lose Citgo because it's the only offshore asset with any value worth seizing in the event of a default or Icsid compensation awards unfavorable to Venezuela's interests," an energy ministry official told Argus today.

The International Centre for Settlement of Investment Disputes (Icsid) in Washington issued separate rulings in second-half 2014 awarding over a combined \$2bn in compensation to US companies ExxonMobil and Gold Reserve for assets that were nationalized by the Venezuelan government in 2007 and 2009, respectively.

Citgo's \$2.5bn borrowing deal will be carried out in two operations, including a \$1bn cash loan paying 10pc interest or \$100mn annually, and a \$1.5bn Eurobond issuance, through a new corporate entity called Citgo Holdings, which as of 23 January 2015 was not yet listed on Delaware's registry of corporations, a US-based financial sector executive told Argus.

PdV will guarantee the loan with terminal and pipeline assets valued at \$750mn that Citgo is transferring to Citgo Holdings, a corporate structure positioned above parent firm Citgo and directly below PdV's US subsidiary PdV America, according to a new corporate chart obtained by Argus.

PdV is also guaranteeing the loan with 49pc of parent company Citgo, according to a prospectus for the potential bondholders.

Citgo's issuance in the Eurobond market will escape possible oversight by the US Securities and Exchange Commission because PdV and Citgo voluntarily quit the US-based bond issuance markets in 2005-06, the ministry official said.

"The SEC can't touch Citgo or PdV, and this borrowing operation through Citgo Holdings is completely legal, contrary to what some critics are saying," he added.

The SEC declined to comment.

The government plans to challenge both Icsid compensation rulings in March, the ministry official said.

Caracas is wary that companies with compensation claims would seek court injunctions to block Citgo?s sale, the official said.

ExxonMobil and Gold Reserve had no comment.

ConocoPhillips, whose Venezuelan oil assets were also nationalized in 2007, asked a Texas court last year to look into the possibility that PdV's planned sale of Citgo is a gambit to move cash assets to Venezuela where they would be immune from seizure by US creditors with compensation disputes under way at Icsid.

An Icsid panel hearing Conoco's compensation claim against PdV could award the US firm up to \$4.5bn later this year, the ministry official said.

"Gold Reserve, Exxon and Conoco add up to awarded and imminent awards totaling \$6.5bn, which is near the \$7bn value that Citgo was assigned in 2014 in an independent valuation shortly before it issued a \$650mn bond," he said.

There was no immediate comment from Conoco.

Sharply lower oil prices since mid-2014 also influenced PdV's decision to leverage Citgo for dividends instead of selling the US refiner despite reports that French financial advisor Lazard had secured bids worth up to \$10bn from interested potential buyers.

PdV's average export price was about \$88/bl as recently as September 2014, but by last week it had dropped under \$40/bl, energy ministry figures show.

"Lower oil prices also impacted the dynamics of the sales transaction we were considering," the ministry official said, adding that a price rebound this year would give PdV more leeway to put Citgo back on the sales block or further leverage the US refiner.

But if oil prices do not recover and the government defaults, PdV could "simply walk away from the Citgo debt because we know we're going to lose the company anyway," the official added.

The \$2.5bn that PdV will borrow through Citgo will raise the latter's total debt to over \$4.2bn.

In the event of a default, "whoever lends Citgo the \$2.5bn, if it's a single lender, either will be Citgo's eventual buyer, or else will be Citgo's eventual seller to a new owner," the ministry official said.

Credit ratings agencies Fitch and Moody?s have separately issued a deep speculative grade of B- for Citgo Holdings. Moody?s pegs the new firm even lower at Caa1. Prior to the issuance of \$1bn in secured term Loan B and \$1.5bn in secured notes, both due in 2020, Citgo Holdings will own 100pc of Citgo and related assets, Moody?s said in a 22 January note.

"The security package for the Term Loan B and the notes is weak as it will only include the terminals and pipelines to be acquired from Citgo plus 49pc of the capital stock of Citgo," Moody?s said.