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 February 4, 2016 - 2:20 PM EST
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Fitch Affirms CITGO Petroleum at 'B'; Outlook Stable

Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDR) for CITGO Petroleum Corporation at 'B' and the senior secured ratings (revolver, term loan, and fixed-rate industrial revenue bonds [IRBs]) for CITGO Petroleum at 'BB/RR1'. Fitch has also affirmed the long-term IDR for CITGO Holding Inc. at 'B-' and the senior secured ratings for CITGO Holding at 'B+/RR2'.

The Rating Outlook is Stable.

Approximately $3.8 billion in debt is affected by today's rating action. A full list of ratings follows at the end of this press release.

KEY RATING DRIVERS

CITGO PETROLEUM

PDVSA Ownership Key Rating Constraint

While Fitch's criteria generally guides to a maximum of two notches between a weak parent and stronger subsidiary, it allows for discretion in other cases, including wider notching under circumstances where the parent (PDVSA, currently at 'CCC') may be heading for bankruptcy while the subsidiary operates with little risk of a consolidated bankruptcy filing. Fitch believes CITGO fits these criteria given structural features, including a lack of guarantees between the entities, restrictions on dividends to CITGO Holding and thereby PDVSA, asset location, U.S. jurisdiction, and the existence of Delaware C-Corps between PDVSA and the CITGO operating companies.

There is a relatively strong operational linkage between CITGO and parent PDVSA. This relationship is evidenced by a history of use of CITGO as a source of dividends to its parent, frequent placement of PDVSA personnel into CITGO executive positions, control of CITGO's board by its parent, and existence of a crude oil supply agreement. However, there are important structural and legal separations between the two entities. CITGO is a Delaware corporation with U.S. domiciled assets and is separated from ultimate parent Venezuela by two Delaware C-Corps, CITGO Holding, Inc., and PDV Holding Inc. The most important factor justifying the notching between CITGO and Venezuela is the strong covenant protections in CITGO's secured debt, which caps the ability of the parent to dilute CITGO's credit quality. With regard to these protections, Fitch believes it would be difficult for CITGO Petroleum to refinance current debt in order to escape or amend these structural features absent buy-in from existing creditors given the existing covenant package. CITGO debt has no guarantees or cross-default provisions related to PDVSA debt.

Metrics Comp Well to Higher Rated Peers:

CITGO's latest 12 months (LTM) credit metrics compare well to higher rated peers on a stand-alone basis, with debt/EBITDA at 0.7x and gross interest coverage of 22.0x. Fitch's base case forecast anticipates that debt/EBITDA will not rise above 2.0x and the company will remain free cash flow (FCF) neutral after accounting for dividends to CITGO Holding. These metrics imply a stand-alone credit profile significantly stronger than CITGO's current 'B' IDR.

Minimal Refining Capex Program:

CITGO does not have any major expansions planned at any of the three refineries. Capital spending will largely be targeted at maintenance and regulatory projects, with estimated maintenance capex levels of $300 million. This provides additional financial flexibility, as well as the ability to send dividends out to CITGO Holding for debt service while still maintaining high-quality refining assets.

Good Refining Assets and Positioning:

CITGO owns and operates three large, high-quality refineries, providing sufficient economies of scale to compete with larger tier-1 refiners. Positioning in the Midwest and Gulf Coast provides access to a variety of crudes, including landlocked U.S., Canadian, and heavy sour imports at the Gulf. Their position on the Gulf allows favourable access to export markets, which is an important component in maintaining competitive gross margins relative to peers. CITGO's refineries have average to above-average complexity, allowing for conversion of heavier and sour crudes into higher value products, which complements the crude access mentioned above as the company can opportunistically purchase the most economic crudes.

Strong Historical Financial Results Driven by Refining Macro:

Product exports have served as a relief valve for U.S. refiners' production, helping keep U.S. refinery utilization high. Increased global refining capacity and moderating economic growth could increase competition for U.S. exports. However, Fitch believes U.S. refiners, including CITGO, will remain competitive in export markets given geographic and cost advantages enjoyed by U.S. refiners. CITGO has generated $2.5 billion in FCF before dividends over the past four years.

U.S. crude and product inventories remain at or above historical averages. This represents a significant backlog for U.S. refiners to work through heading into 2016, and a potential benefit to refiners in the form of discounted North American crudes. Elevated crude supplies will likely continue to keep pressure on both global and domestic crude prices, while maintaining modest supply cost advantages for some U.S. refiners. Above average product inventories do represent a risk for 2016, as high inventories could pressure product prices and decrease refiner gross margins.

While key crude differentials have narrowed -- in particular the Brent-West Texas Intermediate (WTI) spread has compressed to around $2.5/barrel (bbl), from as much as $10/bbl-$15/bbl in 2013 -- other cost advantages remain, such as low U.S. natural gas and power prices. Ample domestic supplies should continue to provide U.S. refiners, including CITGO, with cost and feedstock advantages relative to global peers, albeit at lower levels.

CITGO HOLDING

Debt Supported by CITGO Petroleum Cash Flow:

Ratings for CITGO Holding are one notch below CITGO Petroleum, reflecting structural subordination and a reliance on CITGO Petroleum to provide dividends for debt service. Dividends from CITGO Petroleum will provide the majority of debt service capacity at CITGO Holding, and will be driven primarily by refining economics and the restricted payments basket. As part of the 2015 financing, CITGO Holding purchased $750 million in logistics assets from CITGO Petroleum, which provide approximately $50 million in EBITDA at CITGO Holding available for interest payments. These logistics assets are pledged as collateral under the CITGO Holding debt package. Fitch expects CITGO Holding interest coverage to average 3.0x through 2016-2018, with debt/cash flow of 3.5x.

Limited Ability to Weaken CITGO Petroleum Corp.:

Fitch believes the strong covenant protections contained at the CITGO Petroleum level significantly limit the ability of PDVSA to lever up the CITGO companies. Since dividends from CITGO Petroleum are expected to provide most (approximately 75%) of the cash flow to service CITGO Holding debt, covenants at CITGO Petroleum also limit the ability of PDVSA to impair debt service at CITGO Holding. Fitch believes that PDVSA creditors may attempt to make claim on CITGO assets in the event of a PDVSA bankruptcy, but would have limited success given CITGO's U.S. jurisdiction and legal separations.

KEY ASSUMPTIONS

--No major capital projects over the forecast horizon with annual capex of $300 million;

--Regional crack spreads decline to normalized levels over the forecast horizon;

--No material increases in corporate SG&A and refining opex/bbl;

--CITGO Petroleum pays approximately 100% of net income to CITGO Holding.

RATING SENSITIVITIES

CITGO PETROLEUM

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Improved ratings at PDVSA given the explicit ratings linkage;

--Stronger structural separations between CITGO Petroleum and PDVSA leading to a wider notching rationale between the two or a change in ownership leading to a stand-alone credit analysis.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Weakening or elimination of key covenant protections contained in the CITGO Petroleum senior secured debt through refinancing or other means;

--Further weakening in credit quality at PDVSA;

--A sustained operational problem at one or more refineries.

CITGO HOLDING

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Improved ratings at PDVSA or CITGO Petroleum given the explicit ratings linkages;

--Stronger structural separations between CITGO Holding and PDVSA leading to a wider notching rationale between the two or a change in ownership leading to a stand-alone credit analysis.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Weakening or elimination of key covenant protections contained in CITGO Holding senior secured debt through refinancing or other means;

--Further weakening in credit quality at PDVSA;

--Operational problems at CITGO Petroleum which negatively impacted the dividend stream to CITGO Holding.

Any change in existing covenant protections that weakened existing credit protections could change the rationale for notching between CITGO Petroleum and PDVSA, which could negatively impact the ratings at CITGO Holding.

LIQUIDITY

At Sept. 30, 2015, CITGO Petroleum had approximately $1.2 billion in available liquidity, consisting of $890 million in revolver availability, $54 million in cash, and $219 million in availability on the A/R facility. Fitch believes this will be adequate for near-term liquidity requirements, which would consist primarily of working capital needs in the event of another large move in crude oil or product prices. Fitch believes capex, dividends, and other calls on liquidity at CITGO Petroleum will be funded primarily with operating cash flows. CITGO has no maturities until the $640 million term loan due in 2021.

Fitch believes that liquidity at CITGO Holding will remain adequate over the near term. Liquidity is supported by the dividend stream from CITGO Petroleum to CITGO Holding, as well as a debt service reserve account with funds sufficient to cover 12 months of interest and required amortization of principal payments on the CITGO Holding senior secured term loan B and two semi-annual interest payments on the CITGO Holding senior secured notes. As of Sept. 30, 2015, $1 billion remained outstanding on CITGO Holding term loan due in 2018, as CITGO had prepaid $300 million of the term loan through the excess cash flow feature of the CITGO Holding credit agreement.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

CITGO Petroleum Corp.

--Long-term IDR at 'B';

--Senior secured credit facility at 'BB/RR1';

--Senior secured term loans at 'BB/RR1';

--Senior secured notes at 'BB/RR1';

--Fixed-rate industrial revenue bonds at 'BB/RR1'.

CITGO Holding Inc.

--Long-term IDR at 'B-';

--Senior secured term loans at 'B+/RR2';

--Senior secured notes at 'B+/RR2'.

Date of Relevant Rating Committee: Feb. 3, 2016.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Parent and Subsidiary Rating Linkage (pub. 10 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869363

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999060

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999060

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Brad Bell
Associate Director, U.S. Oil & Gas
+1-312-368-3149
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mark Sadeghian
Senior Director
+1-312-368-2090
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (February 4, 2016 - 2:20 PM EST)

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