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Court officer overseeing auction changed recommendation of

winner

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Settlement with bondholders creates $2 bln gap between

bids

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New York judge could soon decide on the bonds' validity

By Marianna Parraga

HOUSTON, Sept 9 (Reuters) - The auction of the parent of

Venezuela-owned U.S. refiner Citgo Petroleum is turning into a

heated contest between creditors trying to get compensation for

the expropriation of their Venezuelan assets and holders of a

defaulted bond issued by the country's oil company PDVSA.

The interests of both groups have become increasingly

opposed as a court in Delaware moves toward the completion of a

bidding process that has lasted nearly two years and saw the

supervising officer change his recommended winner last month

amid a bidding war.

At stake is the future of the seventh largest U.S. refiner,

owned by Venezuela and found liable for the South American

nation's debt. The court plans to listen to all parties,

witnesses and experts next week in a hearing to decide the

auction's final winner.

In July, court officer Robert Pincus selected a $7.4 billion

bid from a subsidiary of Toronto-listed miner Gold Reserve ( GDRZF )

as the auction's frontrunner.

But following the arrival of unsolicited offers that forced

the extension of the bidding period, he marked a $5.9 billion

bid from an affiliate of hedge fund Elliott Investment

Management as his recommended winner, mainly because it included

a separate $2.1 billion cash payment that would settle a claim

against Venezuela by the holders of a defaulted PDVSA bond.

The change has triggered objections and a motion from Gold

Reserve ( GDRZF ) and four other parties to disqualify the bid from

Elliott's affiliate Amber Energy, which is pending. Holders of

the PDVSA 2020 bonds and top creditors Crystallex and

ConocoPhillips ( COP ) have supported Amber's bid, according to

court filings.

The switch also has intensified a long-standing clash in

U.S. courts between companies whose Venezuelan assets were

expropriated more than a decade ago and defaulted bondholders.

"The sudden shift reopens the debate over how the PDVSA 2020

notes risk is priced, a question that has swung the process

before," said consultancy Aurora Macro Strategies in a report

last month.

The PDVSA 2020 bonds, which have been rallying since Pincus

determined that Amber's bid was superior, were trading at 98.5

cents on the dollar on Tuesday after reaching an all-time record

of 100 cents last week.

WHO'S FIRST?

Gold Reserve ( GDRZF ), Venezuela and other creditors want to wait for

the resolution of a separate, key case in New York over the

validity of the bonds before paying anything to the holders,

while some bidders, including Amber, propose settling the

bondholders' claim now to remove an obstacle that has been

clouding the auction.

The difference in those strategies has created a gap of at

least $2 billion in the valuation of the offers, making bids

difficult to compare.

Court officer Pincus said on Friday that "the evaluation

criteria adopted by the court makes clear that the bid with the

highest price tag will not necessarily be the best bid."

The gap also has become crucial for the determination of how

many of the 15 claimants registered in Delaware to collectively

cash up to $19 billion from auction proceeds will get

compensation, and if paying the bondholders beforehand will

deprive some creditors of payment.

While Amber's bid fully covers nine creditors plus a small

portion of Gold Reserve's ( GDRZF ) $1.18 billion claim if accepted, the

Gold Reserve ( GDRZF ) group's bid proposes full coverage of 12

creditors.

Gold Reserve ( GDRZF ) declined to comment. Amber Energy did not reply

to a request for comment.

New York Judge Katherine Polk Failla said on Tuesday that a

decision on the bondholders' rights will come this month, which

could change the weight and priority bidders have assigned to

that claim.

In Delaware, parties are this week getting ready for the

sale hearing, which could include a second set of arguments next

month if Judge Leonard Stark chooses to wait for the New York

ruling before making his final decision.