Latin American Herald Tribune – Venezuela's New PDVSA 2020 Rated Caa3 by Moody's

NEW YORK — Moody’s Investors Service («Moody’s») assigned a Caa3 rating to Petroleos de Venezuela, S.A. («PDVSA»)’s 8.5% $3.4 billion in senior secured notes due 2020. The outlook on the rating in negative.

On October 28, 2016, PDVSA exchanged its 5.250% senior notes due 2017 and 8.50% senior notes due 2017 for 8.50% $3,367,529,000 senior secured notes due in October 2020. The 2020 notes will be amortized in four equal installments, starting in 2017. The 2020 notes are secured by a first-priority security interest on 50.1% of the capital stock of CITGO Holding, Inc. (Caa1 stable) and are unconditionally and irrevocably guaranteed by PDVSA Petroleo, S.A. (unrated).

RATING RATIONALE

The ratings of PDVSA and its notes combine: (i) the company’s underlying baseline credit assessments (BCA), which represent the issuer’s intrinsic credit risks regardless of government support and (ii) Moody’s assumptions about the willingness and the ability of its government to provide extraordinary support in a distressed situation.

PDVSA’s ratings reflect the inextricable relationship between PDVSA and the Government of Venezuela as well as the company’s status as a driver of Venezuela’s economy, a key source of the government’s revenues and the country’s primary source of foreign exchange.

PDVSA’s caa3 BCA reflects Moody’s view of a high probability of default or debt restructure in the next twelve to eighteen months, on the back of low cash generation related to low oil prices and lack of visibility regarding the company’s investing and refinancing capacity over the short to medium term.

This negatively compares to the company’s material maturities of $7.3 billion in 2017 and $1.3 billion in 2018, as per 2015 financial statements.

Moody’s assumes a high probability of support from the government and a very high dependency between the company and the government.

The equalization of the caa3 BCA and the Caa3 issuer rating reflects Moody’s view of a symbiosis between PDVSA and the Government of Venezuela and the rating agency’s expectation that in a continued fiscal and economic deterioration, the government will become even more dependent on PDVSA and the company’s access to capital will continue to be hurt by sovereign risk concerns.

The negative outlook reflects Moody’s view that the loss bondholders would have to bear in the event of a default — a credit development to which we assign a very high probability of occurrence — is extremely difficult to assess with precision given Venezuela’ highly volatile economic and political environment. However, we anticipate that loss-given-default could be greater than 35%.

The 2020 notes have a first-priority security interest on 50.1% of the capital stock of CITGO Holding, Inc. Moody’s typically does not grant a high consideration to security packages based on capital stock given i) the difficulty in estimating value and ii) the low priority claim of stocks in case of bankruptcy.

In addition, given PDVSA’s high liquidity risk and probability of default, Moody’s believes that executing the change of control at CITGO Holding may prove difficult and slow, reducing the effectiveness of the security package.

Thus, although the security interest on the capital stock of CITGO Holding enhances protection of investors at the 2020 notes as compared to unsecured debt, the enhancement is not material.

CITGO Holding is based In Delaware, U.S., and is a holding company with no direct operations and no significant assets other than its ownership of 100% of the capital stock of Citgo Petroleum Corporation (B3 stable), which is engaged in the refining, marketing and transportation of petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals and lubricants, mainly within the continental United States. CITGO Holding also has 100% of Citgo Holding Terminals, Southwest Pipeline Holding and Midwest Pipeline Holding, all operating companies.

Given the negative outlook on PDVSA’s ratings, an upgrade is not envisioned at this point. However, an upgrade of Venezuela’s sovereign rating coupled with a change in sovereign considerations with regards to support and dependence. Also, a material improvement of the company’s liquidity and leverage metrics could trigger a positive rating momentum.

Further liquidity deterioration, including material cash outlays to the government, could led to a downgrade. Also, a downgrade on the sovereign’s credit ratings would lead to a downgrade on PDVSA’s ratings.

PDVSA, the state oil company of Venezuela, is one of the world’s largest integrated petroleum companies. Virtually all of its upstream exploration and production and most of its downstream refining and marketing operations are located in Venezuela. As of December 2015, its annual revenues and assets amounted $55.3 billion and $202 billion, respectively. As of June 30, 2016, PDVSA’s consolidated debt amounted to $43.2 billion.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in October 2016. Other methodologies used include the Government-Related Issuers published in October 2014.