July 3 (Reuters) - A $7.38 billion bid by a unit of Toronto-listed miner Gold Reserve (GRZ.V) was named preliminary winner of an auction of shares in the parent of Venezuela-owned refiner Citgo Petroleum, organized by a U.S. court to pay creditors for debt defaults and expropriations in the South American country.
If the offer is approved by the court, proceeds from the auction of PDV Holding would be enough to compensate 11 of the 15 creditors fighting in U.S. courts since 2017 to recover billions of dollars after Venezuela's wave of nationalizations, an officer overseeing the auction said in a filing.
Bermuda-based Gold Reserve expects to have its own $1.18 billion claim compensated from the proceeds, following the expropriation of its mining assets in Venezuela. The bid made by its subsidiary Dalinar Energy Corporation will now be evaluated by Delaware Judge Leonard Stark before a final decision.
Dalinar was created by Gold Reserve to participate in the bidding round and take control of Citgo, Venezuela's most prized foreign asset and the seventh largest U.S. refiner.
Even though the cash component of the Gold Reserve-led group's bid seems lower than rival offers, it covers a substantial number of creditors including oil producer ConocoPhillips (COP.N), miners Rusoro (RML.V) and Crystallex and conglomerates Koch, OI Glass (OI.N) and Siemens (ENR1n.DE).
Dalinar's bid exceeded a $3.7 billion offer by Contrarian Funds' Red Tree Investments, which had been selected in March as starting bid.
"Dalinar's proposed sale transaction is approximately $3.576 billion higher than the stalking horse transaction and is the highest bid that meets the bid requirements," court officer Robert Pincus, who oversees the auction, said in a court filing.
The bid relies on a combination of equity and debt financing, and is supported by Rusoro, two units of Koch, and Siemens. It includes financing from JP Morgan Chase Bank, the Toronto Dominion Bank and Sumitomo Mitsui Banking Corp, according to the filings.
"Our bid satisfies creditors further down the waterfall than was ever contemplated by any prior bid since the inception of the Delaware sale process," said Paul Rivett, Gold Reserve's executive vice chairman, in a statement.
BONDHOLDERS CHASING
Contrary to rivals, Dalinar's offer did not include an agreement to pay holders of a key defaulted Venezuela bond collateralized with Citgo equity, which implies "a degree of risk," Pincus said in one of the filings.
The lack of a plan to immediately settle that claim, which is pending a final decision in a separate case in New York, could delay the distribution of proceeds from the auction, sources from other bidding companies said.
Parties representing the bondholders, which previously told the court they could file an injunction, did not immediately reply to a request for comment.
"In this bidding, there was an obvious fight between cash and certainty of closure, and guidance provided by the court was contradictory," one of the sources said.
In a case first introduced by Crystallex against Venezuela, PDV Holding was found liable for the country's debt. The Delaware court has since then attempted to secure a deal to satisfy up to $19 billion in claims.
Houston-based refiner Citgo Petroleum, the crown jewel of Venezuela's overseas assets, severed ties with PDVSA in 2019 following U.S. sanctions. An opposition-led Congress that year appointed a new board of directors for the refiner, which is now overseen by opposition-controlled supervising boards.
Venezuelan President Nicolas Maduro's government has called the auction a robbery of sovereign property.
SPICED-UP COMPETITION
New bidders emerged in the last mile of the auction, following court decisions in parallel legal cases that encouraged new and improved offers.
A group led by commodities house Vitol made a last-minute bid exceeding $10 billion, while a consortium led by private equity firm Black Lion Capital Advisors submitted an all-cash $8 billion bid, according to court filings and sources.
But several bids failed to meet the auction's requirements, according to Pincus' filing.
An affiliate of Elliott Investment Management won a first bidding round last year, but its conditional $7.3 billion offer was rejected by most creditors, creating the need for a new round and a fresh set of rules to encourage competition in the complex auction.
A final hearing on the sale process' results has been scheduled for August 18 once creditors complete research and file any objections.
With Venezuela under U.S. sanctions, the U.S. Treasury Department must also green-light the auction's winner.
However, the department in April declined to provide guidance on its protection over Citgo, which was recently extended until December, Pincus told the court in a briefing call last month.
Reporting by Shubham Kalia in Bengaluru and Marianna Parraga in Houston; Editing by Janane Venkatraman, Mrigank Dhaniwala, Susan Fenton, Louise Heavens, Alexandra Hudson
