Rating Action: Moody's downgrades ratings of PDVSA and CITGO Petroleum
Global Credit Research - 15 Jan 2015
New York, January 15, 2015 -- Moody's Investors Service downgraded the long term issuer rating and senior unsecured notes of Petroleos de Venezuela (PDVSA) to Caa3 from Caa1 and changed the outlook on the ratings to stable from negative. Moody's also downgraded CITGO Petroleum Corporation's Corporate Family Rating to B3 from B1; its Probability of Default rating to B3-PD from B1-PD; and its senior secured ratings on term loans, notes and industrial revenue bonds to B3 from B1. The rating on Citgo's senior secured revolving credit facility was downgraded to B2 from B1, reflecting a lower expected loss in case of default vis-a-vis other classes of debt in the company's capital structure. The rating outlook for CITGO was changed to stable from negative. CITGO is PDVSA's wholly-owned US-based refining subsidiary.
The rating actions follow Moody's downgrade on January 13, 2015 of the Venezuelan government's bond ratings to Caa3 from Caa1 with a stable outlook. The principal driver of Moody's decision to downgrade Venezuela's sovereign rating is a marked increase in default risk owing to lower oil prices. In addition, the key source of vulnerability for the sovereign's credit profile is the external accounts. Although Moody's believes the sovereign is highly likely to honor the upcoming €1 billion Eurobond maturing in March 2015, the probability of a debt default occurring in the next 1-2 years has risen from an already high level given the large mismatch between inflows and outflows.
RATINGS RATIONALE
In downgrading PDVSA's ratings to equal those of the government, Moody's acknowledges the state oil company's substantial oil and gas resources, among the largest in the world, and that the company to date has never defaulted on its debt obligations. However, PDVSA's on-balance-sheet debt obligations have increased to USD 49.4 billion as of its latest June 30, 2014 interim financial statements from USD 39.3 billion on year earlier.
PDVSA's ratings reflect it its key role as the state oil company and the government's control over PDVSA's finances and access to foreign currency. PDVSA is a driver of Venezuela's economy, a key source of the government's revenues and the country's primary source of foreign exchange. The government approves and controls PDVSA's budget and has steeply increased its transfer payments over the past few years in the form of royalties, social payments and dividends to support government spending and social programs, a trend that accelerated in recent years. Given fiscal and economic deterioration in Venezuela, the government has become even more dependent on PDVSA, which has further constrained the state oil company's capital investments and increased its debt burden.
As a government-related issuer, PDVSA's ratings reflect Moody's assumption of a high level of government support and default correlation between the two entities. Any future negative rating actions affecting the government's ratings would be likely to negatively impact PDVSA's ratings as well.
In turn, the downgrade of CITGO Petroleum's Corporate Family Rating to B3 with a stable outlook primarily reflects heightened risk associated with PDVSA's ownership and financial stress. 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.
The ratings of the senior secured credit facility and other classes of debt reflect their priority claim under Moody's Loss Given Default methodology. The senior secured credit facility is rated one notch higher than the B3 Corporate Family Rating because of its priority claim to certain assets of the company. The remaining debt is rated at the same level as the Corporate Family Rating.
The methodologies used in these ratings were Global Integrated Oil & Gas Industry published in April 2014 and Global Refining and Marketing Rating Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on
www.moodys.com for a copy of these methodologies.
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