Fitch Ratings has placed the ratings of CITGO Petroleum and CITGO
Holding on Rating Watch Negative following PDVSA's announced debt
exchange offer. PDVSA (Long-Term Issuer Default Rating 'CCC') expects to
issue new 8.5% sinking notes due 2022 under a voluntary exchange for two
existing bonds: a 8.5% sinking bond with $2.05 billion principal
payments due in November 2016 and November 2017 and a $3.0 billion 5.25%
bond due in 2017. The exchange offer, if successful, has the potential
to increase CITGO bondholders' exposure to PDVSA default risk through
the use of 50.1% of CITGO Holding stock as collateral for the new PDVSA
notes. Existing debt indentures at CITGO Petroleum and CITGO Holdings
contain change of control provisions which could potentially be
exercised if the new PDVSA notes default and there is foreclosure on
collateral, namely the majority stake in CITGO Holdings. Fitch intends
to resolve the Negative Watch following the expiration of the announced
PDVSA exchange offer, which is scheduled for October 14. Potential
changes to CITGO's ratings will be based on Fitch's assessment of
changes in linkage between PDVSA and CITGO based on the final terms of
any exchange or agreement, as well as the likelihood that triggering the
change in control provision would heighten CITGO's probability of
default.
KEY RATING DRIVERS
Taken together, the equity pledge and potential for PDVSA to default on
the new notes increase refinancing risk for CITGO, as well as increase
exposure to material events outside CITGO's control, namely the
willingness and ability of PDVSA to meet debt service obligations. In
the case of a PDVSA default on the new notes due 2020, foreclosure on
the equity collateral would likely trigger change of control provisions
in existing CITGO debt. If CITGO was unable to obtain sufficient
consents from lenders, the company would be obligated to make an offer
to repurchase outstanding debt at 101. CITGO would have a 60-day window
in which to repurchase, providing some time to refinance debt or
otherwise raise sufficient liquidity. While Fitch believes CITGO would
likely have the ability to either obtain lender consents or refinance
the existing debt package, external events including capital market
shocks or difficulty reaching consensus amongst a diverse bondholder
group could impair the company's ability to do so within the 60-day
repurchase window.
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 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. However, Fitch believes the ratings linkage could potentially
increase depending on the final terms of a PDVSA debt exchange.
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 PDVSA by two Delaware C-Corps, CITGO
Holding, Inc., and PDV Holding Inc. The most important factor justifying
the notching between CITGO and PDVSA is the strong covenant protections
in CITGO's secured debt, which limit the ability of the parent to dilute
CITGO's credit quality. Key covenants include limitations on restricted
payments, asset sales, incurrence of additional indebtedness, and
guarantees. CITGO debt has no guarantees or cross-default provisions
related to PDVSA debt. However, as noted, the PDVSA exchange has the
potential to increase linkage between the two entities.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CITGO include:
--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 operating expense
per barrel;
--CITGO Petroleum pays approximately 100% of net income to CITGO Holding
as available under the restricted payments basket.
RATING SENSITIVITIES
CITGO PETROLEUM
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
--Execution of the PDVSA debt exchange on terms which increases CITGO's
credit exposure to PDVSA via the pledge of 50.1% of CITGO Holding equity
and potential change of control considerations, tightening the ratings
linkage between the two entities;
--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.
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;
--A change in ownership leading to a stand-alone credit analysis.
CITGO HOLDING
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
--Execution of the PDVSA debt exchange on terms which increases CITGO's
credit exposure to PDVSA via the pledge of 50.1% of CITGO Holding equity
and potential change of control considerations, tightening the ratings
linkage between the two entities;
--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.
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;
--A change in ownership leading to a stand-alone credit analysis.
LIQUIDITY
At June 30, 2016, CITGO Petroleum had approximately $913 million in
available liquidity, consisting of $817 million in revolver
availability, $29 million in cash, and $67 million in availability on
the A/R facility. Fitch believes this will be adequate for near-term
liquidity requirements in the ordinary course of business, which would
consist primarily of working capital needs in the event of another large
move in crude oil or product prices. Fitch expects that capex,
dividends, and other calls on liquidity will be funded primarily with
operating cash flows. CITGO Petroleum has no maturities until the term
loan B due in 2021, with a remaining principle of $639 million. CITGO
Holdings secured term loan B is due in 2018, with a remaining principle
of $656 million. As of June 30, the company has prepaid approximately
$644 million of the term loan B through the excess cash flow feature of
the credit agreement.
FULL LIST OF RATING ACTIONS
Fitch has placed the following on Rating Watch Negative:
CITGO Petroleum Corp.
--Long-Term Issuer Default Rating (IDR) 'B';
--Senior secured credit facility 'BB/RR1';
--Senior secured term loans 'BB/RR1';
--Senior secured notes 'BB/RR1';
--Fixed-rate industrial revenue bonds 'BB/RR1'.
CITGO Holding Inc.
--Long-Term IDR 'B-';
--Senior secured term loans 'B+/RR2';
--Senior secured notes 'B+/RR2'.
Date of Relevant Rating Committee: Sept. 21, 2016
Summary of Financial Statement Adjustments - Fitch has made no material
adjustments that are not disclosed within the company's financial
statements.
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/site/re/869362
Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)
https://www.fitchratings.com/site/re/886557
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 05 Apr 2016)
https://www.fitchratings.com/site/re/879564
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012057
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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