Citgo share fight heads to appellate court

Pennsylvania appellate court judges will hear arguments today on the future control of Venezuela's most important overseas asset, US-based refiner Citgo.

The US Third Circuit Court of Appeals could block one path to restitution for companies with assets expropriated by Venezuelan governments or make vulnerable the US refining and terminal infrastructure those governments have repeatedly mortgaged for cash.

Citgo, a subsidiary of Venezuelan national oil company PdV, has tried to exude steady profitability as lenders, jilted investors and rival political factions wrestle for shares of the company. The court will hear arguments this afternoon over whether a US district court erred in deciding last fall that debtors can attach PdV, and by extension, Citgo, to satisfy the expropriation of Crystallex mining assets by the Venezuelan government.

A district court judge last August determined that Citgo assets were effectively the possessions of Venezuela, not indirectly held through subsidiaries. The finding allowed Crystallex to pursue an auction of shares of Citgo's controlling US holding company. PdV insisted the court erred by associating PdV with the expropriation and by ignoring its sovereign immunity. Venezuelan opposition leader Juan Guaido's attorneys filed separately last month and argued that the decision could imperil US foreign policy.

Venezuela took over Crystallex's Las Cristinas gold mining assets almost a decade ago. The World Bank's International Center for Settlement of Investment Disputes (Icsid) awarded the company $1.2bn and interest for the expropriation in 2016. PdV was not a party to the arbitration.

Crystallex, now controlled by New York-based investment firm Tenor, laid the groundwork to pursue Citgo in 2017. The company sought to force payment of the debt through access to Venezuelan assets in the US. PdV said the court improperly set aside its sovereign immunity and its status as a separate entity from the Venezuelan government. Crystallex argued that PdV, directly controlled by and essential to the funding of President Nicolas Maduro's government, could not be separated from Venezuela's leadership.

Venezuela losing US leverage

US sanctions cut off Citgo payments to Venezuela in 2017, and in January halted shipments of diluent essential to the country's crude exports. But Citgo's 750,000 b/d of US refining capacity and associated pipelines and terminals remain vital to Venezuela's current and future governments.

The US assets support billions of dollars of commercial and Russian lending. Those lenders do not want other creditors to seize that collateral. PdV must pay $72mn in interest on 29 April on a 2020 bond secured with 50.1pc of the shares of Citgo's holding company. The company must pay more than $800mn in principle and interest in October. The remaining 49.9pc of shares were pledged to back a $1.5bn loan from state-controlled Rosneft.

PdV and Crystallex have reached settlements twice. The most recent agreement, reached last fall, stalled auction proceedings and involved a roughly $400mn payment to Crystallex before falling apart in December.

Appellate judges decided last month to allow arguments from bondholders and Guaido's opposition government.

The US and most western governments recognize Guaido, head of Venezuela's national assembly, as an interim president leading a transition to new elections. Guaido appointed new Citgo directors in February, and the US refinery is the only Venezuelan institution so far over which the opposition leader has exerted any control over. His administration still has no access to Citgo revenue.

"This proceeding has thus endangered US foreign policy, threatening a judicial auction of highly visible strategic assets of the republic — albeit assets indirectly held," Guaido's attorneys wrote. "Such an auction would not just be unseemly; it would be dangerous, undermining US foreign policy by impeding President Guaidó's ability to complete the transition of the republic to democracy."

But no matter who will run the country, Venezuela owes substantial debts, Crystallex responded last week. The appellate court's charge was only to consider the district court's decision — not how plans might change for the executive branch. Guaido appointments have shown no more independence of Citgo from a Venezuelan government than Maduro's, Crystallex said.

"As the Assads and Castros of the world will attest, our nation's record of pressuring dictators into retirement through economic pressure is not one of unalloyed success," Crystallex wrote. "Even if it were appropriate for this court to consider new facts in these appeals (and it is not), mere speculation about PdV's future under the Guaido regime — if it ever fully comes to power — cannot erase two decades of Venezuela's disregard for corporate formalities."