Citgo Holdings: Possible Foreclosure of Shares

Here’s a “down the rabbit hole” credit story that’s just come to our attention, but which might have a happy ending for the BDCs involved. Citgo Holdings has pledged 50.1% of its stock to support its parent – Petroleos de Venezuela’s (PDVSA)- 2020 bonds. A billion dollar debt payment is due, and the funds are not available. Big debt holder of the PDVSA bonds Ashmore Group wants to be repaid and proposes to foreclose if not paid. However – and this where business and politics torn from the headlines intersects – the Trump Administration might intervene to prevent the seizure. That’s because PDVSA and Citgo are effectively controlled by Venezuela’s opposition leader and “self proclaimed President” Juan Guaido.

Guaido is a U.S. ally and an opponent of actual President Nicolas Maduro. That’s making the Trump administration consider an unusual intervention in the debt markets. This is ably described in a Bloomberg article by Ben Bartenstein published on October 22 about the subject:

While some U.S. officials are leery of interfering in the bond market or property rights, the White House also worries that it would be a political disaster for Guaido to lose Citgo, the Houston-based refining unit of Venezuela’s state-owned oil company, the people said. President Nicolas Maduro’s regime could blame that on Guaido, Trump and Wall Street, they said.

As a result, officials in Washington are acknowledging the increasing likelihood that the Treasury Department’s Office of Foreign Assets Control revokes General License 5, effectively putting transactions related to the PDVSA 2020 bonds on the same footing as other Venezuelan financial deals that are prohibited. There’s still some opposition to such a move, the people said, and talks continue. The U.S. has refrained from formally promising this to Guaido’s representatives because that may dissuade them from negotiating with creditors, the people said.

“If OFAC revokes GL5 and makes changes to the related FAQ guidance, the enforcement on the collateral securing the 2020 bonds will be unauthorized,” said Cecely Hugh, investment counsel in emerging-market debt at Aberdeen Standard Investments in London. “This means that the collateral would be effectively worthless while the sanctions are in place.”

At June 30, 2019 one BDC – Oaktree Specialty Lending (OCSL) had invested $21.8mn in Citgo Holdings debt due 2020. The debt was valued at par. Now the good news: on August 15, 2019 the 2020 debt seems to have been refinanced, according to a company press release. What we don’t know is if OCSL doubled down and invested in either of the two new facilities that “took out” the 2020 debt. Also both OCSL and sister BDC Oaktree Strategic Income (OCSI) have close to $30mn invested in the debt of Citgo Petroleum Corp, a subsidiary of Holdings. We don’t know if that debt will be affected now – or by the final maturity in 2024 – by what’s happening in the world of realpolitik. The good news is that all publicly traded Citgo Petroleum debt – as opposed to the PDVSA debt – is trading at or above par.

This is more complicated than our usual credits, but we’re adding Citgo – parent and subsidiary – to the under-performers list with a CCR rating of 3 (Watch List) till the smoke clears.