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| Source: Visual Capitalist |
(Bloomberg) -- Ashmore Group Plc and Venezuela's government may be headed for a legal battle as a potential default on the state oil company's 2020 bonds sets off a rush to lay claim to the nation's most prized asset abroad.
Ashmore, which owned about half the securities as of June 30, has urged Petroleos de Venezuela to make the $913 million payment on its 2020 notes due Oct. 28, yet the team advising National Assembly President Juan Guaido claims it doesn't have the funds, three people familiar with the matter said.
What happens next is critical for Venezuela because the bonds are backed by a 50.1% stake in Citgo Holding Inc., the U.S. refining company that's a unit of PDVSA and thought of by many Venezuelans as part of their patrimony. If the oil company defaults, London-based Ashmore could set in motion legal proceedings that may cause Citgo to be auctioned off to the highest bidder to pay back creditors.
That's forced PDVSA's ad hoc board and Guaido's attorney general to consider seeking an injunction against MUFG Union Bank, the trustee on the bonds, to prevent it from trying to sell Citgo, people familiar with the matter said.
The argument would be that the 2016 debt swap that created the notes was invalid because it wasn't approved by the opposition-led National Assembly, the people said. The legislative body is set to discuss the matter Tuesday morning, according to an agenda obtained by Bloomberg.
The threat of seeking an injunction "could be a gambit to get investors to settle," said Russ Dallen, managing partner at consultant Caracas Capital in Miami. "If bondholders think they won't get their collateral, they may be more willing to reach a deal with the PDVSA board and the Guaido administration, which is the preferred outcome for everyone."
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The face-off follows a months-long lobbying effort by Guaido's team for an executive order shielding Citgo from creditors. President Donald Trump's administration has balked so far. Right-wing groups, including Grover Norquist's Americans for Tax Reform, have argued that intervening would interfere with property rights.
But a bipartisan bloc of U.S. senators and representatives including Marco Rubio, Ted Cruz and Lizzie Fletcher has urged the president to take action. They argue that a PDVSA default would open the door for Russia's state oil giant Rosneft to take control of Citgo shares. PDVSA pledged a 49.9% stake in the Houston-based refiner to Rosneft as collateral on a loan in late 2016. Rosneft said Friday that it "has no intentions to enter into real ownership and management of the company."
U.S. Treasury Secretary Steven Mnuchin has previously said that, in the event of a PDVSA default, Citgo's loan from Russia would be reviewed by the department's Committee on Foreign Investment in the U.S., which can derail deals on national security concerns.
Canadian miner Crystallex International Corp. also has a claim on Citgo -- $1.4 billion in Citgo Petroleum Corp. stock -- resulting from Venezuela's nationalization of the gold industry in 2011.
Several Guaido advisers have suggested that the PDVSA 2020 bonds are illegitimate. They cite Article 150 in the Venezuelan constitution, which says the National Assembly must approve any contracts of national interest. PDVSA has not customarily gotten the legislature's consent for its borrowing, yet their argument is that a bond backed by Citgo, the nation's crown jewel abroad, is in the national public interest.
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