By Andrew Scurria 

Venezuela can afford to make a payment to bondholders next week, avoiding a $913 million debt default that would cost the country control of Citgo Petroleum Corp., according to a lawyer for creditors circling the Houston-based refiner.

Andrew Rosenberg, who represents creditors with collateral rights over Citgo, said he believes Venezuela's U.S.-backed opposition leaders have access to enough cash to make an upcoming payment on bonds backed by a majority stake in the company, a Venezuelan state asset since 1990. But bondholders are also drawing up plans to take over Citgo if they aren't paid, he said.

The looming payment has the opposition government led by Juan Guaidó scrambling. After taking control of Citgo from Venezuela's ruling leftist government in February, opposition leaders now risk losing control of the company, considered the country's most valuable foreign asset.

It is also an obvious source of repayment for creditors -- bondholders that lent money to Venezuela under President Nicolás Maduro and multinational companies that had property in the country nationalized under his late predecessor, Hugo Chávez. There isn't nearly enough of Citgo to go around, sparking a race among creditors to lay claim to the company.

Off all the claimants circling Citgo, its most immediate threat is from bondholders including Ashmore Group PLC, BlackRock Financial Management Inc. and Contrarian Capital Management LLC that are represented by Mr. Rosenberg and hold a 50.1% stake in the company as collateral.

While Venezuela has been careful so far to pay down the Citgo-backed bonds, Mr. Guaidó's parallel government has signaled they won't be paid in full on Oct. 28.

A voluntary restructuring of the debt could avert a default, Mr. Rosenberg said. Bondholders have signed confidentiality agreements to negotiate with the opposition but haven't reached a standstill agreement, a person familiar with the matter said. Citgo has considered bankruptcy as one option if creditors closed in, and companies often file for chapter 11 protection shortly before an expected foreclosure. Citgo declined to comment.

After a default, the bondholders can try to foreclose on the collateral and put the shares up for sale, which could take Citgo out of Venezuelan control and deal a crippling blow to the opposition movement in Caracas.

Bondholders would appoint a board of directors consisting of Americans to run Citgo for an interim period while the stock is put up for auction, Mr. Rosenberg said. Financial adviser Ducera Partners LLC has been hired to assist in a potential marketing process, he said.

After the bondholders are repaid, excess value from the sale would return to the opposition, Mr. Rosenberg said. He said the most likely buyer was a major U.S. oil company.

Mr. Guaido's aides have been lobbying the Trump administration to modify U.S. sanctions on Venezuela to take away bondholders' ability to foreclose on the shares. Seven mostly Republican lawmakers have urged President Trump to order the modification, which would shield Citgo from the consequences of default.

So far, the Treasury Department hasn't done so. Mr. Rosenberg dismissed lawmakers' concerns that Citgo would be dismantled and sold for parts after a foreclosure, saying that creditors have no reason to push for a liquidation because they can only recoup what they are owed -- and no more.

"Corporate raiders who break up companies, it's because they bought it for $6 a share and they think they can get $9", Mr. Rosenberg said. "There's no possible upside to us in disrupting operations. It's entirely fearmongering."

He also said the opposition can pay bondholders either from cash held by Citgo itself or from blocked accounts that came under Mr. Guaidó's control when the U.S. recognized him as Venezuela's rightful leader in January.

Other Venezuela bondholders including T. Rowe Price Group Inc. had offered to cover the debt payment, but only if the Treasury Department's trading restrictions on Venezuelan debt were lifted, a person familiar with the matter said. The Treasury Department has signaled it isn't inclined to lift the restrictions, which block sales of Venezuela bonds between U.S. entities.

José Ignacio Hernández, Mr. Guaidó's attorney general, disputed that the opposition had the resources to pay in full on Oct. 28. Its goal is "finding a reasonable solution in an orderly and consensual process," he said.

The opposition-controlled National Assembly in Caracas passed a resolution on Tuesday declaring the pledge of Citgo stock by state oil giant Petróleos de Venezuela SA to be illegal, showing the political difficulties of dealing with debt incurred under Mr. Maduro.

With U.S. support, Mr. Guaidó and his allies wrested control of Citgo's boardroom in February, severing its ties with PdVSA and installing friendly directors. In August, a Delaware judge ratified them as the company's rightful board. The takeover marked a victory for the opposition, but meant the bond payments were now its responsibility to make.

The uncertainty surrounding Citgo underscores the difficulties in the Trump administration's strategy of putting financial pressure on Mr. Maduro to try to force his ouster. Last year, before Mr. Guaidó made his bid for Venezuela's presidency, the Treasury Department authorized bondholders to pursue Citgo after a default.

Citgo has argued the policy no longer makes sense with the company now under the control of Mr. Guaidó, a U.S. ally. Mr. Maduro, who retains control of most key state institutions in Venezuela including the military, has accused the U.S. of "stealing" Citgo by funneling it to the opposition.

"Citgo at this point is more than Venezuela's refiner in the U.S.," said Amir Richani, a risk analyst with ClipperData. "It represents the internal struggle of the country's politics."

Write to Andrew Scurria at Andrew.Scurria@wsj.com

(END) Dow Jones Newswires

October 21, 2019 13:39 ET (17:39 GMT)