PDVSA CITGO to issue $2.5 billion in debt to give to Venezuela
Moody's assigned a Caa1 rating to Citgo Holding, Inc saying "The security package for the Term Loan B and the notes is weak as it will only includes the terminals and pipelines to be acquired from Citgo plus 49% of the capital stock of Citgo."
Petroleumworld.com, Jan 26, 2014
Standard & Poor's Ratings Services today affirmed its 'B-' corporate credit rating on U.S. refinery CITGO Petroleum Corp. based on plans by its ultimate parent PDVSA to arrange a dividend recapitalization of its U.S. operations. The outlook is stable. They also affirmed their 'B+' issue-level rating on CITGO Petroleum's senior secured debt and the recovery rating remains '1'.
S&P also assigned a 'B-' corporate credit rating to CITGO Holding Inc., a newly created U.S. company that will own PDVSA's interests in CITGO Petroleum. The outlook is stable. S&P also lowered the SACP on CITGO Petroleum to 'b+' from 'bb' and assigned a 'b+' SACP to CITGO Holding.
S&P also assigned a 'B-' issue-level rating CITGO Holdings' proposed $2.5 billion senior secured debt due 2020. The recovery rating is '3', reflecting their expectation for meaningful (50% to 70%) recovery in the event of default. This debt consists of a $1 billion term loan B due 2020 and $1.5 billion notes due 2020.
"We assess CITGO Petroleum and CITGO Holding on a consolidated basis since CITGO Holding wholly owns CITGO Petroleum and is in this case serving as the funding vehicle for the transaction but receives nearly all of it cash flow from CITGO Petroleum," said credit analyst Terry Pratt. "The rating on CITGO Petroleum is constrained by the rating of its parent PDVSA. We assess the consolidated standalone credit profile of CITGO Petroleum and CITGO Holding at 'b+' based on a "fair" business risk profile and "highly leveraged" financial risk profile."
The outlook on CITGO Petroleum and CITGO Holding is stable. "Because we already lowered our rating on CITGO Petroleum to 'B-', we would expect the rating would remain 'B-' with a stable outlook even if we lowered our rating PDVSA further," concluded S&P.
The rating on PDVSA reflects that of Venezuela. "We don't expect PDVSA's relationship with the government to change significantly in the next two to three years," said S&P. "We also believe the government won't significantly reduce its heavy involvement in the sector or in the company. Therefore, the rating on PDVSA will likely follow the rating trajectory on the sovereign."
A negative rating action on PDVSA would not likely lead to a negative rating action on CITGO Petroleum or CITGO Holding because "we believe it's unlikely that CITGO Petroleum and CITGO Holding will be drawn into insolvency proceedings at the group level. As such, we would not envision a downgrade of CITGO Petroleum or CITGO Holding unless they experiences unexpected liquidity issues," S&P reasoned.
"We would raise the rating on CITGO Petroleum and CITGO Holding if we raise our rating on PDVSA above 'CCC+', assuming that their consolidated SACP remains at least 'b-' or higher (it is currently 'b+')," hypothesized S&P.
Moody's assigned a Caa1 corporate family rating to Citgo Holding, Inc and a Caa1, LGD4 rating to its proposed US$1 billion in secured Term Loan B and US$1.5 billion in secured notes, both due in 2020. Proceeds of the transactions will be mostly used to pay dividends to PDVSA (Caa3 stable). The outlook on the ratings is stable.
The Caa1 ratings on Citgo Holding, Inc, 100% owner of Citgo Petroleum (Citgo B3 stable), are primarily driven by the latter's credit quality. As a holding company, Citgo Holding, Inc's liquidity and source of funds to service its debt are mostly dependent on Citgo's cash generation and dividend payment capacity, which are vulnerable to volatile refined product prices and refining margins. During the last twelve months ended in September 2014, Citgo distributed USD 704 million in dividends and, at the closing of the quarter, its total unadjusted debt was USD 1.7 billion.
On a consolidated basis, the proposed transaction will increase Citgo Holding, Inc's adjusted leverage to 3.5 times gross debt/EBITDA from 2 times as of September 2014. This compares to Citgo's adjusted leverage of 2 times as of September 2014.
Prior or at the closing of the transactions, Citgo Holding Inc will own 100% of Citgo as well as one company owner of five oil products terminals, CITGO Holding Terminals, plus two companies owners of pipeline networks, Southwest Pipeline Holding and Midwest Pipeline Holding. Citgo Holding Inc will acquire the terminal and pipeline companies from Citgo for USD 750 million, with proceeds from the proposed transactions; during the last twelve months ended in September 2014, these assets generated USD 40 million in EBITDA.
The new Term Loan B and the secured notes will only be guaranteed by the terminal and pipeline companies; Citgo is not a guarantor of the proposed transactions. The security package for the Term Loan B and the notes is weak as it will only includes the terminals and pipelines to be acquired from Citgo plus 49% of the capital stock of Citgo.
Citgo Holding, Inc will maintain a reserve account for the benefit of the creditors. The reserve account will be funded on the issue date with funds sufficient to cover one semi-annual interest payment on the debt; the issuer will be obligated to maintain at least such level in the reserve account until the maturity of the loan and the notes.
The B3 ratings on Citgo reflect heightened risk associated with PDVSA's ownership and financial stress. PDVSA depends on CITGO for dividends and controls the company's board and strategic direction. It also supplies a significant share of CITGO's crude requirements under a long-term supply agreement at market-based prices. PDVSA periodically has borrowed through CITGO, increasing the subsidiary's financial leverage, and continues to limit the company's capital investment and growth opportunities. While CITGO's assets are located in the US and its credit agreements provide certain protections to lenders, including limitations on dividends, it lacks an independent board, with its members and senior management appointed by PDVSA. Meanwhile, the refineries continue to generate good financial results, fund capital spending internally, and maintain a solid liquidity profile, including cash and committed bank facilities.
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