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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