Maduro Rivals Seek Break With Citgo

(Argus, 17.Oct.2019) — Venezuela’s main political opposition is pressing for a deal with foreign bondholders to suspend a looming $914mn obligation that is tethered to coveted US refining assets.

The high-stakes standoff over the PdV 2020 bond is closely watched by a myriad of other creditors, including Russia and China that have outstanding oil-backed loans to the Opec country.

Envoys representing the US-backed claimant to Venezuela’s presidency, Juan Guaido, have made overtures to institutional investors holding the bonds. The issuance was born out of a controversial 2016 swap that pledged shares in Citgo, the US refining subsidiary of Venezuelan national oil company PdV, as a way to avoid a disorderly default.

The bondholders are owed $842mn in principal and $72mn in interest on 27 October. Because the deadline falls on a Sunday, the effective date of the payment is the following day. The coupon payment, but not the principal, has a 30-day grace period.

Guaido’s shadow administration, which has nominal control over Citgo but no authority over PdV, says it is unable to pay.

President Nicolas Maduro, who is no longer recognized by most Western countries as Venezuela’s head of state, had been honoring the PdV 2020 bond payments until last May, when the Guaido team stepped in with a $72mn interest payment aimed at preventing Citgo from falling into creditors’ hands.

At the time, the US Treasury — which has an extensive suite of oil and financial sanctions on Venezuela — released some of PdV’s frozen US funds for this end. Although it is not clear how much money is left in PdV’s embargoed US coffers, the more daunting bond payment due in 10 days is seen as far beyond the opposition’s wherewithal to fulfill.

At the time of the May interest payment, Maduro’s opponents dismissed precedent concerns, insisting that he would be gone before the more daunting October obligation came due. With Maduro still in control, the Guaido administration and its overseas advisers have grappled for weeks over how to handle the debt payment. Lobbying efforts to persuade an increasingly distracted White House to issue an executive order or tweak the sanctions to protect Citgo from seizure by creditors fell flat.

Mutual Recriminations

Both Guaido’s team of exiles and the bondholders now blame each other for not approaching the matter in good faith.

“We keep pushing for a negotiated and rational solution,” a senior opposition figure involved in the talks with the bondholders told Argus. “We need to agree on a forbearance, hence time to craft a solution that takes into account the market value of the debt as well as the invalidity issue.”

The institutional investors that hold the PdV 2020 bonds, which include prominent names such as Ashmore, Fidelity, Blackstone and T Rowe Price, have not commented publicly on the matter.

A financial sector executive close to the bondholders said the Guaido team came to the negotiating table too late. “If I were a bondholder, I would not be thrilled by a proposal that says ‘give me some more time while I figure out if I owe you anything at all’.”

Talks with some of the bondholders are taking place in the wake of a polemical resolution passed by Venezuela’s opposition-controlled National Assembly on 15 October. The assembly, which is presided over by Guaido, declared that the bond violates article 150 of Venezuela’s constitution because it was not approved by the legislative body as required for contracts deemed to be in the national public interest. The resolution goes on to declare that the bond also breaches constitutional articles 311 and 312 because its financial conditions are “harmful owing to the irrationality in which PdV structured the swap and subsequent issuance.”

Some high-level Venezuelan exiles and Wall Street critics say the bond was a reckless investment from the start. But at the time of the swap, even one of Guaido’s current appointees to a parallel PdV board, former economic consultant Alejandro Grisanti, recommended the swap as a “very safe, very solid” investment with a “very good yield”.

Longer term, what some are already interpreting as an effective debt repudiation by Guaido could alienate the very lenders that a future Venezuelan government will need to rebuild the country. Reconstruction of Venezuela’s oil-based economy is estimated to cost as much as $200bn.

Citgo has 750,000 b/d of refining capacity in the US states of Texas and Louisiana, in addition to related pipeline and terminal infrastructure. The company is considered Venezuela’s most valuable overseas asset. Another creditor, US hedge fund Tenor Capital Management, has a separate claim on Citgo for Venezuela’s takeover of the gold mining assets of defunct Canadian miner Crystallex, which Tenor now owns. But US sanctions on Venezuela block the claim from execution in spite of US court proceedings favorable to Crystallex. No such sanctions-related impediment stands in the way of bondholders from pursuing Citgo in lieu of payment.

UN Blow

In a separate development today, Venezuela was elected to a seat on the UN Human Rights Council, defeating a campaign by the opposition and human rights groups in favor of Costa Rica.

The election marked a significant diplomatic victory for Maduro. Caracas will serve for three years starting in January along with 13 other new members on the 47-nation panel.

An estimated 5mn Venezuelans have fled the country in recent years amid shortages of food and medicine. Although the Organization of American States (OAS) and the Inter-American Development Bank no longer recognize Maduro’s authority, the UN still does.

Seeking to forge a softer image, the Maduro government is expected to soon release about two dozen political prisoners.

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