a unique bond

 

Welcome to The Brink. I’m Nicolle Yapur, a reporter in Bogota, where I’m following the auction for PDVSA’s most valuable foreign asset. We also have news on the second-quarter’s surge in defaults led by distressed private equity-backed firms bought with floating-rate loans before the Fed’s hiking cycle began. Follow this link to subscribe. Send us feedback and tips at debtnews@bloomberg.net or DM.

A Unique Bond

A legal fight over a unique bond issued by Venezuela’s state-owned oil company is heating up.  A group of bondholders has been working for months to secure payment following the auction to sell the parent of US-based refiner Citgo Petroleum Corp., the most valuable foreign asset owned by Petroleos de Venezuela SA. But the nature of the preferred bid to buy the company could throw a wrench in their plans.  The CITGO Petroleum Corp. Lake Charles Refinery in Louisiana. Photographer: Bryan Tarnowski/Bloomberg At 90 cents on the dollar, the notes are an exception among bonds sold by PDVSA. Although the company defaulted on them five years ago, investors still see great odds for payment because the securities are backed by a majority stake in Citgo Holding, another subsidiary. That means that whoever buys PDV Holding — the parent company — would likely have to settle that pledge with the bondholders. Bond prices, however, have slid in recent weeks after a court-appointed adviser in Delaware recommended a bid filed by a consortium including Canadian miner Gold Reserve to take over the refiner. The proposal doesn’t include a deal with the bondholders and is structured in a way that would bypass their claim. Prices haven’t dropped further as investors expect there will be some sort of settlement, according to Francesco Marani, head of trading at Madrid-based broker Auriga.  But the Gold Reserve bid is adding uncertainty to an already complex process. Venezuela creditors participating in the auction have expressed concerns about the sale not being able to close without addressing the bondholders, as it opens the door for more litigation. Crystallex, a separate Canadian miner and the top plaintiff in the main case against the Venezuelan government, objected to the Gold Reserve bid, as it “presents an unacceptable risk.” Gold Reserve argued that settling with the bondholders would divert billions of dollars from other creditors seeking to collect from the sale proceeds. Plus, current US sanctions against PDVSA prevent the notes’ pledge from being executed, which reduces, “if not eliminates entirely,” the risk they represent to the Citgo sale, the firm said in a letter filed to the Delaware court. Judge Leonard Stark in Delaware is scheduled to hold the sale hearing for Citgo mid-August. Adding to the complexity, bondholders are also waiting for US District Judge Katherine Polk Failla in New York to rule over the validity of the notes, which was challenged years ago by Venezuelan representatives in a separate proceeding.  After the Gold Reserve bid was recommended, bondholders turned to Judge Failla for protection, including a potential injunction in case the Delaware court decided in favor of the Canadian miner before she issues her ruling, which is expected in Septembe