Fitch Rates New CITGO Holding, Inc. 'B-'
MIAMI -- Fitch Ratings has assigned a 'B-' rating to CITGO Holding, Inc.'s (CITGO Holdco) IDR and an initial rating of 'B+/RR2' to CITGO Holdco's Senior secured term loan and notes. The Rating Outlook for CITGO Holdco is Stable.
By Fitch's definition, a 'B' rating is considered "Highly Speculative."
"'B' ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment," says Fitch.
CITGO Holding, Inc. is expected to raise approximately $2.5 billion in term loan and high yield notes. Proceeds from the notes will be used primarily to fund a special one-time dividend to ultimate parent PDVSA, and fund a debt service reserve to support the current transaction.
CITGO Holdco's ratings are supported by the midstream security pledged to debt at Holdco; other credit enhancements including six-month debt service reserve accounts (which expand to 12 months prior to making any distributions up to PDVSA); the strong covenant protections in place at CITGO Petroleum Corp, which limit the ability of PDVSA to lever that business up and impair its ability to fund Holdco debt; as well as the solid long-term position of CITGO's refining business, which continues to benefit substantially from the shale revolution.
As modeled in Fitch's recovery, there is also decent residual value available to Holdco debtholders. In the event of liquidation, and after CITGO Petroleum bondholders are repaid, Fitch expects that this value would flow to Holdco bondholders given their structural superiority to other entities in the PDVSA chain. This results in superior recovery prospects of RR2(+2 notches above the IDR).
Credit concerns include the structural subordination that Holdco debt will have to debt at CITGO Petroleum Corp; the dependence of Holdco debt upon distributions from the volatile refining business; and Holdco's closer linkage to a financially weaker parent, PDVSA (rated 'CCC; Stable Outlook by Fitch') when compared to its parent, CITGO Petroleum Corp. Fitch downgraded CITGO Petroleum Corporation to 'B' on January 9th, in large part due to this linkage.
UNDERLYING ASSET QUALITY AT CITGO STRONG
CITGO's ratings are supported by the scale and quality of the company's refining assets, with three high-complexity refineries consisting of approximately 749,000 barrels per day (bpd) of refining capacity on the Gulf Coast and Midcontinent; significant access to price-advantaged Canadian and U.S. shale crudes, resulting in strong financial performance and free cash flow (FCF) before dividends; export capability out of the Gulf that allows it to access higher growth markets abroad; and strong covenant protections in the senior indenture, which limit the ability of CITGO's parent to dilute CITGO's credit quality.
STRONG COVENANT PROTECTIONS
It is important to note that there are relatively robust covenant protections in CITGO Petroleum Corp's secured debt which restrict the ability of its parent to dilute CITGO's credit quality. These protections not only justify the rating differential between the two entities, they also benefit CITGO Holdco by limiting the ability of PDVSA to lever up the main source of Holdco's funds for debt repayment.
Elements of this ring-fencing include a debt/cap maximum of 60%, with a lower 55% test for purposes of making distribution to the parent, and a restricted payment basket which limits the ability of CITGO to make distributions to its parent. There are no cross defaults or guarantees between CITGO and PDVSA, CITGO's assets are U.S. domiciled, and there are two Delaware Corporations between PDVSA and CITGO Petroleum Corporation.
Fitch also believes it would be challenging for CITGO Petroleum Corp to refinance its debt and thereby escape these covenants. In July of 2014, CITGO completed a major refinancing of virtually all of its debt, which shares pari passu in the same security and has the same covenant package (revolver, term loan, notes, and fixed rate IRBs).
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Improved ratings at CITGO Delaware Corp or its indirect parent, PDVSA; stronger structural separations between CITGO and PDVSA leading to a wider notching between the two; or enhanced asset coverage pledged at the CITGO Holdco level.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Further weakening in credit quality at the parent level;
--A sustained operational problem at one or more refineries;
--Weakening or elimination of key covenant protections contained in the senior secured debt through refinancing or other means.
Note that this last action in particular could weaken the rationale for the notching between CITGO and PDVSA, which would negatively impact the ratings at CITGO Holdco.