Citgo Loans Price in Potential Regime Change

The bank debt of oil refiner Citgo Petroleum Corp, US subsidiary of Petróleos de Venezuela SA (PDVSA), has been volatile in recent days as Venezuela’s political crisis deepens and the market prices in a potential regime change in the South American nation.

The company’s US$650m term loan B jumped in secondary trading this week, according to a trader monitoring the debt, after the Houston-headquartered company last Friday installed a new board of directors that is expected to enhance Citgo’s independence from its troubled parent company.

Citgo is also understood to be cutting ties with PDVSA in order to distance itself from sanctions on the country recently imposed by the US, Reuters reported on Tuesday.

“The link has been broken, personnel ties are not there anymore since the new board is in and commercial ties are not there,” said an investor holding PDVSA debt. “Maduro’s appointees were asked to leave so the company can more easily abide by sanctions.”

Citgo has been sandwiched between the political tug-of-war that escalated in January since US-backed head of opposition Juan Guaidó contested the recent election of socialist president Nicolás Maduro.

The fuel company, which owns three oil refineries and a network of pipelines and gas stations in the US, is one of Venezuela’s most important cash cows as Citgo imports the country’s crude oil before refining and distributing it throughout the US.

Fitch Ratings said in a statement on Monday that it placed Citgo Petroleum Corp and Citgo Holding’s CCC ratings on negative watch due to heightened refinancing risk as a result of the US sanctions.

The rating agency said legal uncertainty and headline risks around the sanctions could make it difficult for Citgo to refinance its debt, including a US$900m revolving credit due in July.

The US government in January imposed sanctions on PDVSA, a move designed to result in billions of dollars of lost export revenue over the next year, and said in a press briefing at the time that the company’s assets in certain jurisdictions would be blocked. Transfers to PDVSA from Citgo have been placed in a blocked, interest-bearing account in the US.

Holders of PDVSA bonds have also been banned from trading the securities among other US entities, in accordance with the US-imposed sanctions.

“The sanctions were not that surprising, but when the trading ban was imposed, this shocked all of us,” a second investor said. “Preventing US persons from buying was difficult so trading has closed because no one wants to run afoul of the authorities.”

SEE-SAW LOANS
Last Friday’s appointment of Luisa Palacios, an expert on Latin American markets and affairs, as Chairwoman of Citgo was welcomed by investors.

Citgo’s term loan, which was sold in July 2014 and will mature in 2021, was spotted at 97.62 cents on the dollar on Wednesday morning, from 97.25 cents on Friday.

The loan had followed the political quagmire in the secondary market, dipping to as low as 96.62 cents earlier this month from 99.38 in late January, according to the trader.

Guaidó, who heads Venezuela’s Congress and supports market-friendly oil policies, said he would seize the presidency on an interim basis from Nicolas Maduro on January 23. Maduro was reelected in May 2018 but opposition leader Guaidó, along with the US, European Union and the Organization of American States, among others, deemed the election as illegitimate.

“The market is slowly starting to price in the probability of regime change, but there is a long way to go,” said a US fund manager, adding that President Maduro’s grip on PDVSA and the country’s army was enough to keep him in power for now.

Citgo’s term loan, along with PDVSA’s bonds that use a stake in Citgo as collateral, are also investors’ most-valued Venezuelan-linked debt because the government continues to make repayments on these instruments despite President Maduro defaulting on sovereign debt in the past.

CHANGING OF THE GUARD
Rick Esser, Edgar Rincón, Andres Eloy Padilla along with former PDVSA employees Angel Olmeta and Luis Urdaneta will also join Chairwoman Palacios to make up Citgo’s new board, according to a press release from Citgo.

Palacios, Esser, Rincón, Padilla, Olmeta and Urdaneta are understood to share Guaidó’s market-friendly vision for PDVSA, according to news reports.

The company said in the statement last Friday that the new board would work to “enhance corporate governance” and “protect its assets.”

The new board members must first file documentation with the US courts to wrestle away control of Citgo from PDVSA, but this could be met with legal opposition from the Venezuelan leadership, which values the dollar-denominated revenue source.

Should Citgo circumvent the US sanctions on PDVSA, the company will have less difficulty in refinancing looming debt maturities, the investor added.

In addition to the term loan B, and the US$900m revolving credit facility Owned by Citgo Petroleum, Citgo Holding has a US$1.875bn bond due in February 2020.

Opposition leader Guaidó has asked the US government to protect Citgo’s holdings from creditors in case the company defaults amid the political malaise in Venezuela.

Reporting by Aaron Weinman

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