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 [IDR] '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
total exports.
LIMITED TRANSPARENCY
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%.
KEY ASSUMPTIONS
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.
RATING SENSITIVITIES
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.
LIQUIDITY
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'.
Date of Relevant Rating Committee: Sept. 16, 2016
Additional information is available at 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/site/re/869362
Distressed Debt Exchange (pub. 08 Jun 2016)
https://www.fitchratings.com/site/re/882737
Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)
https://www.fitchratings.com/site/re/886557
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011892
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011892
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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