(Bloomberg) -- Venezuela’s bid to squeeze money out of its U.S.-based oil refining company is coming at a steep price.
Delaware-based Citgo Holding Inc., a unit of Venezuela’s state-owned oil producer, had to boost the yield on a $1.5 billion, five-year bond sale by more than a percentage point to 12.1 percent to attract buyers on Monday, according to a person familiar with the matter, who asked not to be identified because of company policy. Similar-maturity debt from Citgo’s refinery peers yield 8.1 percent on average.
The higher rate was one of several incentives Citgo offered to obtain financing at a time when slumping oil prices and the nation’s dwindling currency reserves under President Nicolas Maduro’s policies have fueled concern Venezuela will run out of money. Citgo, which will use the proceeds to fund a dividend to its parent, also agreed to pay a higher interest rate on a $1.3 billion loan and agreed to a provision that will give creditors complete control of its operating company in the event of a default.
“It feels like a desperation move” by Venezuela, Geoffrey Roth, an analyst at Aberdeen Asset Management, said by telephone from New York.
Venezuela’s Information Ministry didn’t respond to e-mails seeking comment on the bond sale. Fernando Garay, Citgo’s public-affairs manager in Houston, declined to comment.

Debt Reserve

The 2020 bonds issued by Citgo, which has product terminals, pipelines, three refineries and almost 6,000 independently owned gas stations in the U.S., yield 10.53 percentage points over Treasuries, a level that indicates the securities are already distressed.
The securities traded at about 96 cents on the dollar at 11:50 a.m. in New York, according to Trace data.
The bonds are also secured by a 100 percent equity stake in Citgo Petroleum Corp. -- an increase from 49 percent -- in the case of a default, which would compel any future acquirer to buy out the notes at 101 cents on the dollar, according to the person.
The debt is also secured by about $750 million in midstream assets, according to the bond document.
To protect bondholders, Citgo is also setting aside enough money to cover 12 months of principal and interest payments on the debt -- up from six months originally. Before it can issue more dividends to Petroleos de Venezuela SA, Citgo will have to build that so-called debt service reserve to 18 months and reduce leverage to below 2 times earnings before interest, taxes, depreciation and amortization.

‘Very Protective’

“You want to limit their flexibility because you know they would use it,” Robert Matz, an analyst at Covenant Review, said by telephone from New York. “If you know someone is going to bargain for rights because they have the intention of making use of them, then you have to be mindful that your credit has to be very protective.”
Citgo raised the financing on the same day that Standard & Poor’s lowered Venezuela’s credit rating to CCC, eight levels below investment grade, citing the country’s worsening economy and dollar shortages. PDVSA faces about $6 billion in bond payments this year, when Moody’s Investors Service expects oil revenue to tumble by 43 percent.
With Monday’s debt sale and a recent payment from the Dominican Republic for oil purchases, Venezuela has raised almost $5 billion in the past two weeks -- equivalent to more than 20 percent of its international reserves.
“If they can just do that every week, they’ll solve their financial problems,” Russ Dallen, head trader at Caracas Capital Markets, said by phone from Miami. “The problem is that the next $5 billion gets a little bit more difficult.”
To contact the reporters on this story: Katia Porzecanski in New York atkporzecansk1@bloomberg.net; Pietro D. Pitts in Caracas at ppitts2@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh atbwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net Lester Pimentel, Bradley Keoun