Bloomberg News
Citgo Said to Plan $2.5 Billion Debt for Venezuela Dividend
Citgo Petroleum Corp. is planning to raise $2.5 billion that it will use to shore up the finances of its state-owned parent company, Petroleos de Venezuela SA, according to a person with knowledge of the matter.
The U.S. oil refining and marketing unit of PDVSA is seeking to sell $1.5 billion of bonds and obtain a $1 billion loan, according to the person, who asked not to be identified because the information is private. While Citgo’s debt ratings were cut to six levels below investment grade by Moody’s Investors Service last week on concern Venezuela will default, it’s still three steps higher than the government’s rating.
Using Citgo to sell debt would mark a new strategy to raise cash for Venezuela after the government said in October that it had scrapped a plan to sell the Houston-based company. Venezuela owes $2.3 billion to Exxon Mobil Corp. and Gold Reserve Inc. after losing arbitration cases tied to expropriations, and those rulings would make it difficult for the government to sell Citgo without having to pay them off, according to Russell Dallen, a managing partner at Caracas Capital Markets in Miami.
The only reason Citgo would issue the debt “is if they’re going to default on it,” Dallen said in a telephone interview. “And then the bank or the company they issued it to would be able to foreclose and take the property. It’s a back-door way of Venezuela selling the company.”
Officials with Venezuela’s Information Ministry and PDVSA’s press office didn’t immediately respond to e-mails seeking comment. Fernando Garay, Citgo’s public-affairs manager in Houston, declined to comment.
Currency Reserves
Venezuelan President Nicolas Maduro is also seeking to stave off default by courting investments from China after he failed to rally support from other OPEC members to cut output amid the 56 percent plunge in crude prices over the past six months. Oil’s drop has increased the chances that Venezuela will default in the coming two years as foreign currency reserves decline and the economy contracts, according to a Jan. 15 statement from Moody’s Investors Service.
Venezuela said in October that it had scrapped a plan to sell Citgo in deals with price tags estimated from $7 billion to $15 billion, according to court papers. Still, Citgo’s representatives approached potential buyers as recently as November, said people familiar with the sales campaign who asked not to be identified because the talks are private.
Default Swaps
“With crude prices dropping a lot of energy producers are under pressure,” said Sam Margolin, a New York-based analyst for Cowen & Co. “There are refineries interested in the company and their assets, but there are still a lot of questions that have made the atmosphere challenging for bidders and Citgo alike.”
The cost to protect Venezuela’s bonds against non-payment soared to a record 67.51 percent upfront at 3:32 p.m. in New York, according to CMA, a McGraw Hill Financial Inc. unit that compiles dealer quotes in the privately negotiated market. That means investors would pay $6.75 million initially and $500,000 annually to protect $10 million of Venezuelan debt for five years.
Oil provides more than 90 percent of the country’s hard-currency earnings, the most among the Organization of the Petroleum Exporting Countries. The government and state-run oil company owe $21 billion on overseas bonds by the end of 2016, an amount equal to about 100 percent of reserves.
Moody’s reduced Citgo’s corporate family rating to B3 from B1 on Jan. 15, following a 13 cut of the Venezuelan government’s debt rating to Caa3 from Caa3. It also trimmed PDVSA’s rating to Caa3 from Caa1. Standard & Poor’s grades Citgo B-, equivalent to the new Moody’s level.
PDVSA bought half of Citgo in 1986 from Southland Corp., which also owned the 7-Eleven retail chain, according to the Houston-based company’s website. The Venezuelan company acquired the rest in 1990.
(An earlier version of this story corrected the amount of debt protected by credit-default swaps.)
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Pietro D. Pitts in Caracas at ppitts2@bloomberg.net
To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net; Brendan Walsh at bwalsh8@bloomberg.net Brendan Walsh, Mitchell Martin
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