Fitch Downgrades Venezuela's Citgo Outlook to Negative
CHICAGO -- Fitch Ratings has affirmed the Issuer Default Ratings (IDR) for CITGO Petroleum Corporation (CITGO) at 'BB-' and the company's senior secured ratings (including the revolver, term loans, and fixed-rate industrial revenue bonds [IRBs]) at 'BB+'. The Rating Outlook has been revised to Negative from Positive. The recent downgrade of CITGO's ultimate parent PDVSA is the main reason for the revision in Outlook at CITGO.
Approximately $1.08 billion in balance sheet debt is affected by today's rating action.
KEY RATINGS DRIVERS
CITGO's ratings are supported by the scale and quality of the company's refining assets, with three high-complexity refineries consisting of approximately 749,000 barrels per day (bpd) of refining capacity on the Gulf Coast and Midcontinent; significant access to price-advantaged Canadian and U.S. shale crudes, resulting in strong financial performance and free cash flow (FCF); the company's export capability out of the Gulf that allows it to access higher growth markets abroad, especially distillates; the impact of recent reductions in balance sheet debt; and strong covenant protections in the senior indenture, which limit the ability of CITGO's parent to dilute CITGO's credit quality. Other considerations include the historical use of CITGO by its parent as a cash cow, and the historical volatility of refining.
Linkage to PDVSA
These positives are balanced by CITGO's strong operational linkage to parent Petroleos de Venezuela, S.A. (PDVSA) which is evidenced through CITGO's contracts to take approximately 250,000 bpd of PDVSA crude at its Gulf coast refineries, frequent appointment of PDVSA personnel to CITGO executive and board positions, and procurement services agreements between CITGO and PDVSA. At the end of March, Fitch downgraded the IDR of PDVSA from 'B+' to 'B' and revised its Outlook from Stable to Negative, citing PDVSA's inextricable linkage to the government of Venezuela, which in turn has experienced heightened macroeconomic instability, delays in implementation of policies to address rising inflation, distortions in the foreign exchange (FX) market and deterioration in external accounts.
Favorable Crude Spreads
CITGO has benefited from wide discounts associated with landlocked WTI and other interior North American crudes, as embodied in the Brent-WTI gap (average of approximately $8.00/barrel year-to-date) versus historical spreads in the +/-$3/barrel range). While this spread has narrowed considerably from the $16 - $20/barrel level seen in 2011, it remains historically wide and has provided robust cash generation for refineries positioned to take advantage of it and other discounted regional crudes. CITGO can run up to 200,000 bpd of such discounted crudes in its Gulf Coast system, and approximately 100,000 bpd of Canadian heavy crudes at its 167,000 bpd Lemont, IL refinery. It is worth noting that this spread has held up despite a flood of logistics projects that have come online to move crude to consumption centers on the coasts. Current forward prices for oil suggest that a healthy discount will continue at least over the next several years.
Strong Stand-Alone Credit Metrics
CITGO's credit metrics are very strong for the rating category. As calculated by Fitch, at Dec. 31, 2013, CITGO's total debt and capitalized lease obligations fell to $1.34 billion versus $1.37 billion the year prior and $2.2 billion in 2009. Debt reduction came from scheduled amortizations of the company's term loans as well as its capitalized hydrogen plant leases. EBITDA declined moderately to $1.66 billion but remained at very strong levels, resulting in debt/EBITDA leverage of just 0.8x and EBITDA/interest coverage of 11.6x. The company's free cash flow declined to -$344.9 million as of YE 2013 but this was primarily driven by a distribution to its parent PDVSA of $887 million. Absent that distribution, FCF would have been +$542 million, given CITGO's strong cash flow from operations and relatively light capex. It is important to note in this regard that CITGO's restricted payment basket caps the company to distributing cumulative net income levels. Following the $887 million distribution, the allowed dividend basket has fallen to $87 million in Q1. Looking forward, we expect CITGO will be modestly FCF positive in our base case across the next two years.
Liquidity
CITGO's liquidity was ample at year-end 2013 and totaled $984.3 million. This included $102.3 million in cash; $739 million in availability on its main secured $750 million revolver; and $143 million in A/R Securitization availability. The company's secured revolver expires in June 2015, while its A/R Securitization facility, which has a maximum capacity of $450 million, is renewed annually. In addition to this, CITGO has $290 million in repurchased Industrial Revenue Bonds (IRBs), which were held in Treasury and can be remarketed at the company's discretion. Additional liquidity could come from the sale of other assets, or the liquidation of excess inventory (total crude + product inventories increased to 32.7 million barrels at the end of the year, versus more typical levels in the 27-28 million barrel level). Headroom on key financial covenants was good and included a debt-to-cap ratio of 32.8% (versus a 60% max), and interest coverage of 15.7x versus (versus a minimum of 3.0x).
Near-term maturities are manageable, but the company has $861 million due in 2017.
Other Liabilities
CITGO's other obligations are manageable. The deficit on the funded status of CITGO's Pension Benefit Obligation (Pension Assets - PBO) declined to -$192.7 million from -$353.5 million the year prior. The main sources of improvement stemmed from actuarial gains, and better returns on plan assets. CITGO estimates it will contribute $68 million into qualified plans in 2014. CITGO's asset retirement obligation (ARO) was essentially unchanged at $18.76 million and was primarily linked to asbestos remediation. Rental expense for operating leases rose to $170 million in 2013 and is comprised of leases for product storage, office space, marine chartered vessels, computer equipment and equipment used to store and transport feedstocks and refined products.
Covenant Protections
It is important to note that there are relatively robust covenant protections in CITGO's secured debt which restrict the ability of its parent to dilute CITGO's credit quality. These include a debt/cap maximum of 60%, with a lower 55% test for purposes of making distribution to the parent; and a restricted payment basket which limits the ability of CITGO to make distributions to its parent.
The $300 million in 2017 11.5% notes contain 'fall-away' covenant provisions which eliminate certain covenants in the event CITGO achieves Investment Grade status (including the restricted payment basket). These are reinstated if CITGO's debt subsequently falls back into high yield. No other portions of CITGO's debt contain such provisions.
The notching between CITGO's IDR and secured ratings reflects the strength of the underlying security package, which was expanded in 2010 to include the 167,000 bpd Lemont refinery, in addition to CITGO's Lake Charles and Corpus Christi refineries, and select petroleum inventories and accounts receivables.
RATINGS SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
Continued strong financial performance at CITGO centered on maintenance of low debt/EBITDA leverage ratios and continued positive FCF;
Improved ratings at the parent level.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
A downgrade at the parent level;
A collapse in refining fundamentals or sustained operational problem at one or more refineries;
Weakening or elimination of key covenant protections contained in the senior secured debt through refinancing or other means.
Note that this last action in particular would weaken the notching rationale between parent and subsidiary, as the ring fencing created by the secured debt covenants offer substantial protections to all CITGO debtholders.
Fitch has affirmed the following:
CITGO
--IDR at 'BB-';
--Senior secured credit facility at 'BB+';
--Secured term loans at 'BB+';
--Secured notes at 'BB+';
--Fixed-rate IRBs at 'BB+'.
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La controllata di PDVSA mantiene un rating più alto.
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