Citgo could save PDVSA bondholders

Citgo could save PDVSA bondholders

Debt Bonds Capital Markets Corporate & Sovereign Strategy Fixed Income Economy & Policy Politics

Citgo could help bondholders recover losses from a possible default on PDVSA's bonds, an increasingly likely event now that the US government has imposed sweeping sanctions on Venezuela's state-owned oil company.

PDVSA put up 50.1% of Citgo's shares as collateral for its 2020 bonds. Those shares are estimated to be worth $2.5bn to $3bn, based on the US refiner's estimated value of $5bn to $6bn, LatinFinance has heard.

"They could sell the bonds or focus on Citgo's collateral," said an investor in New York when asked how bondholders could recover losses on the $1.6bn in outstanding notes. PDVSA has a $70m coupon payment due in April.

"Citgo's notes were trading in the mid-90s, 70bp above PDVSA's before the embargo took effect on Tuesday," the investor said.

The US government has not prohibited US refineries from buying crude oil from PDVSA, but it has ordered them to put payments into escrow accounts that PDVSA cannot access until Venezuela has a new government. Venezuela has countered by demanding that US refineries prepay for oil shipments.

The US government has permitted US firms with operations in Venezuela, including Chevron and Halliburton, to keep doing business and remain in joint ventures with PDVSA. It has also exempt Citgo from any sanctions until July 27.

"Given the scale of the sanctions, I don't think anything can help stop a PDVSA default," said Ray Zucaro, CIO at RVX Asset Management and a PDVSA bondholder.

In case PDVSA defaults on its 2020 bonds, the lien on Citgo's shares could help investors recoup their losses, but the process could be "long and complicated," Zucaro said.