Citgo To Settle Or Auctioned By Friday

Citgo must settle with Group 1 creditors by Friday, to forestall US Judge Leonard Stark’s sale process order and the risk of the certiorari petition being denied. Citgo is Venezuela’s most prized overseas asset: the seventh-largest refiner in the US, which also operates over 4,000 petrol stations. It has been valued at $32bn and $40bn by its parent company, while it could be closer to $13bn —the GDP of Venezuela is $96.6bn according to the IMF. It is a subsidiary of PDVSA, the Venezuelan state oil firm, separated by PDV Holding and Citgo Holding, based in Delaware, US.

Citgo itself has recovered with up to $5bn, which would be enough to settle its own debts. However, a Delaware court ruled that it was an “alter ego” of the Venezuelan government. The full amount claimed has climbed to over $23bn. Though the court case goes many years back, the argument backing the sentence had nothing to do with actions by President Nicolás Maduro in Caracas. Instead, it was that due to the interim government of Juan Guaidó using Citgo funds to finance itself directly, as well as ignoring corporate procedure.

The process leading up to this ruling was explained by Professor Francisco Rodríguez in the Financial Times. Rodríguez is a Venezuelan economist and the Rice Family Professor of Public and International Affairs at the University of Denver’s Joseph Korbel School.

On October 6th, Venezuelan Attorney General Tarek William Saab issued an arrest warrant against Guaidó, who now lives in Miami, Florida. The case being made is that the interim government used Venezuelan overseas assets to finance itself directly and led to the “alter ego” ruling, adding $19.6bn to Citgo’s debt. This week, we will have to see if negotiations between Caracas and Washington DC provide a solution to save Citgo from creditors.

How did we get here?

In August 2017, Trump administration sanctions forbade US creditors from sitting down with President Maduro, to negotiate debts. This blocked the main avenue for bondholders, and for investors in legal conflicts with Caracas over expropriations and other issues. This particular measure has given birth to other problems to the interests of both US investors and Washington DC. Venezuelan bonds are being bought up by non-western buyers, often through opaque structures in Turkey and the United Arab Emirates. The policy is so counterproductive that it could be one of the first to go; in September the Financial Times noted a modest rally on Venezuelan sovereign bonds.

In 2017, corporations that had faced expropriations such as Crystallex and ConocoPhillips
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were already making the case that Citgo should pay on behalf of Caracas. They argued at the time that Citgo was being used by presidents Chávez and Maduro for their “foreign policy objectives” and thus it was an “alter ego” of the Venezuelan government. However, they failed to make the case.

In January 2019, as Guaidó proclaimed himself president and the formation of an “interim government”, the US seized Venezuelan assets in its jurisdiction and transferred them to him. The administration-in-exile also bypassed all corporate protocol and directly appointed the boards of PDV Holding, its child company Citgo Holding, and the on-the-ground firm Citgo Petroleum. The Delaware court ruled in favour of the creditors precisely due to the actions of the interim government, as pointed out by Judge Stark.

By early 2019, as Professor Rodríguez pointed out, Citgo’s liabilities were “small enough that Venezuela could service it even with its depleted oil revenues –in fact, that is exactly what Maduro was doing up until Venezuela’s US bank accounts were transferred to Guaidó”. For a second time, the regime change policy got in the way of creditors receiving payment. At the time, they amounted to $3.4bn.

The interim government used CITGO and other seized assets as their golden goose. Although, according to Elliott Abrams, US Special Representative for Venezuela, the assets seized were not administered by the Venezuelan opposition but by the US government. If this were the case, it would mean that Washington DC not only allowed for this mistake but contributed towards carrying it out. On the other hand, the White House has been protecting Citgo from creditors by postponing its liquidation, given its paramount importance for Venezuela.

Why did they do it?

Venezuela’s opposition largely tries to be the political alliance that respects the separation of powers and the rule of law. It would be the one respect corporate procedure, contrasting with a populist, corrupt, and authoritarian government. However, it was precisely the leadership of Venezuela’s opposition, supported by the Trump administration, that broke the rules leading to the “alter ego” ruling. Why did they do it?

There is still no clear answer. The little that we know is that Guaidó initially appointed José Ignácio Hernández to defend Citgo. Hernández, however, had testified in favour of Crystallex in April 2017, and was found to favour ConocoPhillips later as Guaidó’s attorney general. The lawyer had been helping creditors build the “alter ego” case before the creation of the interim government; when it was formed, he stood by and watched as they made the perfect legal case for the plaintiffs.

In 2020, Hernández resigned from his position at the Guaidó government. However, there has been no investigation into what were his reasons. At the time, only one opposition figure tried to make a case against Hernández: Jorge Alejandro Rodríguez, from the small party Avanzada Progresista. He argued that the lawyer and Carlos Vecchio, the interim government’s ambassador to the US, were committing fraudulent acts against Guaidó and the rest of the opposition.