Narrowed Down: Remaining Bidders Sweeten Deals for CITGO Auction

By Marianna Parraga

HOUSTON — Coalitions spearheaded by associates of Contrarian Funds, Gold Reserve, and Vitol are developing enhanced bids for the parent company of Venezuela-owned refiner Citgo Petroleum as the pool of possible buyers shrinks, according to insiders involved in the preparation process.

The three groups, which previously competed to establish the opening bid, have been negotiating with financial institutions to obtain the funding required for their bids in the court-managed share sale. Additionally, they are striving to demonstrate that they can fulfill the conditions outlined in their proposals to ensure the transaction’s completion, according to the sources.

In the initial round held in March, a fourth bidder which is associated with Elliott Investment Management was anticipated not to participate further due to perceived legal hazards, according to a source close to their choice.

Since 2017, the Delaware court has attempted to sell off one of Venezuela’s most valuable international assets to settle debts amounting to $20.6 billion owed to 16 creditors due to default payments and nationalizations within the South American nation. Venezuela’s president, Nicolás Maduro, contends that this procedure amounts to “theft” of a state-owned resource.

The Houston-based Citgo, which is ultimately controlled by Venezuela's state-owned oil firm PDVSA, ranks as the seventh-largest refinery in the United States.

A proposal from Red Tree Investments, backed by Contrarian Funds worth $3.7 billion, received approval from Delaware Judge Leonard Stark in April as an initial bid. The investment company along with competing firms has until May 28 to present enhanced offers.

After a June 11 deadline for a court official to choose a victor, the concluding hearing for the sale of shares in PDV Holding, one of Citgo Petroleum’s parent companies, has been set for July 22.

The consortia still have time to tune up offers or decide against bidding. A ruling earlier this week by a New York court dismissing arguments by some companies that could have allowed them to jump the line of creditors established in Delaware could lead to changes in some bids, the sources said.

FIERCE COMPETITION

Robert Pincus, the court-appointed overseer chosen by Stark for the auction process, chose an $7.3 billion bid from Elliott affiliate Amber Energy as the top contender in the initial round of bidding last year. However, the majority of the creditors participating in the auction eventually dismissed this proposition because certain terms hindered the allocation of funds.

Pincus, who is receiving advice from investment bank Evercore, chose Red Tree's less ambitious bid to initiate the auction process this time. He cited greater confidence in its successful completion and viewed it as a means to foster “intense rivalry” among potential buyers.

The proposal encompasses an additional $3 billion set aside for settling obligations, primarily payments to bondholders tied to Venezuela, along with as much as $1.5 billion in notes intended for junior creditors, contingent upon how well Citgo performs.

For the first time, Red Tree entered into a payment arrangement with the holders of a delinquent Venezuelan bond backed by Citgo shares as collateral. This move could eliminate a significant hurdle in allocating funds from the sale to remaining debtors.

Choosing Red Tree’s proposal as an initial offer sparked a fresh conflict amongst creditors. Those prioritized higher supported it since it promised them payment. However, others lower on the hierarchy argued that this bid was insufficient. Some contended that Gold Reserve's competing $7.1 billion offer from their group should have been selected instead.

Although Stark has instructed that pricing should take precedence over the assurance of finalizing an agreement when determining the winner next month, Red Tree's pact with the bondholders has encouraged other parties to pursue comparable arrangements, according to the sources.

To strengthen their chances of sealing the deal, the consortiums have hired banks to structure and enhance their financing.

A source familiar with Red Tree’s preparation efforts mentioned that the company aims to enhance every facet of its initial bid. Meanwhile, competing groups are focusing on strengthening their financial backing or securing better terms for junior debt holders. According to an individual involved, Red Tree remains optimistic about both the pricing and the likelihood of finalizing its proposal.

The Gold Reserve, Vitol, Amber Energy, Red Tree, and a company representing the holders of the Venezuelan 2020 bonds chose not to comment. Citgo and the boards overseeing the refinery also did not respond to requests for comments.

BAD TIMING?

In the first quarter, Citgo experienced a loss of $82 million because of poor profit margins, which also signifies its second successive quarterly deficit. The company’s liquidity, an essential factor for potential buyers, decreased to $2.1 billion by the end of March from $3.8 billion in December.

The firm's net profit dropped to $305 million in 2024 from approximately $2 billion the year before.

Analysts have indicated that the refiner's latest performance along with distinct legal actions in US courts targeting the same assets might reduce the amount of the offers submitted.

Attorneys acting on behalf of Venezuela are battling in Delaware courts to establish a minimum price threshold. This effort aims to prevent Citgo’s assets from being sold at a significant discount, with estimated values ranging between $11 billion and $13 billion as per calculations made by court experts.

The intricate nature of the process is anticipated to pose challenges for Pincus when establishing assessment standards that both the judge and majority of creditors will find agreeable. This could result in further conflicts and postponements.

The individual who wins the auction needs approval from the U.S. Treasury Department, an entity that has shielded Citgo from creditors in recent times.

(Reported by Marianna Parraga; Edited by Christian Plumb and Rod Nickel)