Fitch Expects to Rate PDVSA's Proposed Notes 'CCC/RR4'
23:24 (19/09) - Bron: RTRS
(The following statement was released by the rating agency)
CHICAGO, September 19 (Fitch) Fitch Ratings expects to assign a 'CCC/RR4(exp)'
rating to Petroleos de Venezuela, S.A.'s (PDVSA) up to USD7.1 billion of
proposed senior secured notes. The company expects to issue the notes under a
voluntary exchange for two bonds with final maturity in 2017: the 8.5% coupon
sinking bond with a USD2.05 billion principal payment due in November 2016 and
November 2017 and the USD3 billion 5.25% coupon bond due 2017. The new notes
will mature in four equal annual instalments between 2017 and 2020, carry an
8.5% coupon and will receive a pledge consisting of 50.1% of Citgo Holding, Inc.
(Issuer Default Rating 'B-'/Outlook Stable), a wholly owned subsidiary of
PDVSA. Citgo Holdings in turn owns 100% of Citgo Petroleum Corp (IDR 'B'/Outlook
Stable). Debt at these two subsidiaries amounted to approximately USD4 billion
as of year-end 2015.
KEY RATING DRIVERS
PDVSA's credit quality reflects the company's linkage to the government of
Venezuela as a state-owned entity, combined with increased government control
over business strategies and internal resources. This underscores the close link
between the company's credit profile and that of the sovereign. PDVSA's cash
flow generation has historically been significantly affected by the large amount
of funds transferred to the central government each year.
LINKAGE TO SOVEREIGN
PDVSA's credit quality is inextricably linked to that of the Venezuelan
government. Venezuela's ratings (IDR 'CCC') reflect the sovereign's weakened
external reserves, high commodity dependence, rising macroeconomic distortions,
limited reduced transparency in official data, and continued policy and
political uncertainty. The sovereign's strong repayment record and relatively
low debt amortization profile mitigate imminent risks to debt service. PDVSA is
fully owned by the government and its transfers have historically represented
around 45% of the government's revenues. It is of strategic importance to the
economic and social policies of the country, as oil accounts for around 95% of
The Venezuelan government displays limited transparency in the administration
and use of government-managed funds, as well as in fiscal operations, which
poses challenges to accurately assessing its fiscal state and the full financial
strength of the sovereign. PDVSA also displays similar characteristics, which
reinforces the linkage of its ratings to the sovereign.
UNCERTAIN LEVEL OF TRANSFERS TO GOVERNMENT
Although the excess hydrocarbon prices law eliminates transfers to the FONDEN
national development fund when oil prices are below USD55/barrel (bbl), the low
level of central government reserves will require the government to either
reduce social expenditures or disregard the law and maintain historical levels
of transfers from PDVSA. Fitch believes these transfers will continue to take
place either in the form of royalties, social contributions, dividends or
investments. The high level of transfers to the central government effectively
renders PDVSA's cash flow from operations negative.
FOCUS SHIFTS TO RECOVERY
PDVSA's 'CCC' rating suggests a real possibility of default. If a restructuring
occurs, Fitch anticipates average recovery for PDVSA's bondholders of 31%-50%,
and likely closer to the lower end of the range. While Fitch's recovery analysis
yields a high recovery, the willingness of Venezuela's government to extend
concessions to investors will likely move actual recovery closer to the lower
end of the 31% to 50% range. In addition, should oil prices remain depressed, an
average recovery may lead to additional future defaults in order to further
reduce obligations and allow for necessary transfers to the government. The
proposed senior secured notes have also been assigned an 'RR4' average Recovery
Rating as the collateral provided may only marginally enhance recovery given
default, which could still range between 31% and 50%.
Linkage to government: PDVSA's ratings assume that implicit support from the
government, given the company's strategic importance, would materialize should
the company need it.
Slow hydrocarbon price recovery: Fitch assumes West Texas Intermediate crude
prices to average approximately USD42 per barrel in 2016 and to slowly recover
to approximately USD65 per bbl in the long term.
Stable Production: PDVSA's ratings assume the company's production will remain
relatively flat or decline marginally over the rating horizon.
Catalysts for a downgrade include a downgrade to Venezuela's ratings, a
substantial increase in leverage to finance capital expenditures or government
spending and a sharp and extended commodity price downturn. Although not
expected in the short- to medium-term, catalysts for an upgrade include an
upgrade to Venezuela's sovereign rating and/or the company's real independence
from the government.
PDVSA's current liquidity position is believed to be weak as a result of the
current low oil price environment and transfers to the central government. As of
December 2015, PDVSA reported cash of USD5.8 billion, which compared unfavorably
with short-term debt of USD6.8 billion. The company's current liquidity position
is uncertain given expenditures, transfers to government, and principal debt
payments that might have driven down liquidity from the last reported amount as
of year-end 2015. Under Fitch's base case scenario, which assumes oil prices of
USD42/bbl in 2016 and USD45/bbl in 2017, and investments of USD25 billion
annually, PDVSA's liquidity position will continue to deteriorate. Debt
amortizations for 2017 are estimated at approximately USD7.2 billion, of which
USD5.1 billion is capital market debt obligations. The proposed debt issuance
could lower 2017 principle payments by USD1.6 billion. Venezuela's gross
international reserves have declined by USD4.3 billion to USD12 billion between
January and June 2016.
FULL LIST OF RATING ACTIONS
Fitch expects to assign the following ratings:
--USD7 billion of senior secured notes due 2020 'CCC/RR4'.