*

New bidding round starts after year-long auction ended in

shambles

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Creditors' dispute over minimum bid to add more delays in

8-year-old case

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Bondholders pact released at Gold Reserve ( GDRZF )-consortium's

request

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Bids by Venezuela-linked creditors turn auction into

creditors

game

By Marianna Parraga

HOUSTON, March 27 (Reuters) - A U.S. federal judge

trying to move ahead with an auction of shares in the parent of

Venezuela-owned U.S. refiner Citgo Petroleum is dealing with a

fresh dispute between creditors after a lowball starting bid was

recommended in a reboot of the sale.

The complex auction meant to repay 18 creditors for debt

defaults and expropriations by Venezuela and state oil company

PDVSA was relaunched in January after a year-long bidding

process ended in shambles amid arguments over Citgo's worth and

parallel legal cases.

Lawyers representing Venezuela have also objected to the

method of deciding the fate of the country's most-prized foreign

asset, while claims of some $21 billion are higher than expected

proceeds.

The court decided this time to set a minimum bid for shares

in PDV Holding, a U.S. subsidiary of PDVSA and the parent of

Houston-based Citgo, following the creditors' rejection of a

higher winning offer of about $7.3 billion last year by an

affiliate of hedge fund Elliott Investment Management due to

conditions included.

A court officer overseeing the auction last week recommended

a $3.7 billion bid by Contrarian Funds' affiliate Red Tree

Investment as a "stalking horse" bid or a minimum offer to

Delaware judge Leonard Stark.

A stalking horse bid, which could secure a higher value for

the shares, had not been used in previous rounds.

"The base bid is lower than expected, reflecting the zigzag

of this process and political risks associated to dealing with

Citgo," said Jose Ignacio Hernandez from consultancy Aurora

Macro Strategies.

However, the group that submitted the highest bid, about $7

billion, immediately protested the court officer's choice,

making an emergency request for relief to have access to a

sealed pact to pay holders of a Venezuelan bond.

That consortium includes miners Gold Reserve ( GDRZF ) and

Rusoro and units of conglomerate Koch, all of which are

creditors in the auction.

The request to have the agreement unsealed was granted by

the judge on Wednesday, according to court documents. A redacted

version of the pact was released on Thursday, and a hearing

previously set up for Thursday to listen to the creditors'

arguments was canceled.

Objections to Red Tree's bid will be received through April

4 before the judge makes a decision on the recommended offer.

Two other consortia including creditors and companies such

as trading house Vitol also submitted bids,

according to court filings.

CREDITORS' SWIRL

The 18 creditors include holders of defaulted bonds and

companies whose assets were expropriated or contracts broken in

Venezuela more than a decade ago during an expropriation wave by

late President Hugo Chavez. The government of his successor,

President Nicolas Maduro, has called the auction "the theft of

the century."

The case overseen by Stark was first introduced by Canadian

gold miner Crystallex in 2017 after winning an arbitration case,

allowing other creditors in similar situations to join.

Each creditor is taking a different road to secure payment,

with some companies introducing parallel lawsuits pursuing the

same assets and others crafting financial moves to maximize

proceeds, which has turned the auction into a creditors' game.

ConocoPhillips ( COP ), which holds the largest claims for

almost $12 billion, last year filed a court motion to preserve

the U.S. oil producer's almost top priority among the creditors

and moved to seize payments to Venezuela from an offshore

natural gas in neighboring Trinidad.

Creditors are collectively seeking up to $21.3 billion, but

Citgo was valued at up to $13 billion by experts. Bids have been

even lower mainly because of the risks that competing lawsuits

could prevent proceeds from being distributed.

Citgo, the U.S. seventh-largest refiner, also saw profit

plummet last year by nearly $2 billion to $305 million.

BONDHOLDER ISSUES

The Red Tree $3.7 billion bid was selected because it

includes a payment provision to holders of a bond issued by

Citgo's ultimate parent, PDVSA, according to a court filing,

which would remove a key obstacle from the auction's way.

The holders can file injunctions preventing the proceeds

to be paid if their case, discussed in a New York court, is

resolved.

But some creditors want to make sure that Red Tree's

agreement with the bondholders constitutes a firm commitment. A

decision on how to proceed with the bond's default requires

holders representing no less than 75% of the debt.

"The failure to make public critical components of Red

Tree's bid is a clear violation of the court's December 31, 2024

order," lawyers of Gold Reserve ( GDRZF ) said in a filing last week.

Red Tree's bid includes $3.24 billion in cash and $458

million in non-cash consideration. The group would also issue

new convertible notes to some creditors junior in the priority

list for a potential $1.5 billion value.

Other bidders have unsuccessfully tried to reach a pact with

holders of the PDVSA 2020 bond, which is collateralized with

Citgo equity. The agreement, which is expected to require some

$2.5 billion in payments, is seen as pivotal to get access to

Citgo parent PDV Holding and its assets in the long run.