By Lucas Aristizabal
& John Wiske
NEW YORK -- Fitch Ratings has downgraded Petroleos de Venezuela S.A.'s (PDVSA) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'RD' (Restricted Default) from 'C' and 'CC', respectively.
Fitch has also downgraded PDVSA's National scale rating to 'RD(ven)' from 'CCC(ven)' and affirmed all senior secured and unsecured debt issuances at 'C'/'RR4'. A full list of rating actions follows at the end of this rating action commentary.
These rating actions reflect the payment default on the company's notes due Nov. 2, 2017 and Oct. 27, 2017 due to processing delays that resulted in bondholders receiving principal payments up to one week after the due date. KEY RATING DRIVERSAverage Recovery
Fitch expects the recovery level for PDVSA's bondholders to be at the low end of the anticipated 31%-50% recovery range that is consistent with an RR4 rating. The debt restructuring process, which the company intends to undergo, will likely be prolonged due to the restrictive sanctions imposed by the U.S. government. Obstacles for an expedient restructuring include the inability for creditors to negotiate with key members of the government, a requirement from the U.S. government that a restructuring plan is approved by the opposition-led national assembly, and limitations for incurring new indebtedness in the U.S. capital markets.Uncertain Liquidity Position
PDVSA's decision to use the grace periods for interest payments, which expires on November 13, highlights its weak liquidity positon. During 2017, the company has made payments for more than USD9.0 billion of an estimated USD9.8 billion of interest and principal payments due during the year. These payments compare unfavorably versus its year-end 2016 cash position of USD8.3 billion. 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 displays similar characteristics, which reinforces the linkage of its ratings to the sovereign.DERIVATION SUMMARY
PDVSA's current ratings of Restricted Default (RD) reflect the company's delay in making principal payments on two sr. unsecured notes. Up to before the payment default, PDVSA's ratings were linked to the Venezuelan sovereign ratings, which was is in line with the linkage present for most National Oil and Gas companies (NOCs) in the region; including Pemex (BBB+ IDR), Ecopetrol (BBB IDR), Petrobras (BB IDR), PetroPeru (BBB+ IDR), Enap (A IDR). In most cases in the region, NOCs are of significant strategic importance for energy supply to the countries were they operate as is the case in Mexico, Colombia, Venezuela and Brazil. NOCs can also serve as a proxy for federal government funding as in Mexico and Venezuela and have strong legal ties to governments through their majority ownership, strong control and at times governmental budgetary approvals.KEY ASSUMPTIONS
--Fitch expects Brent oil prices to average USD52.5/b in 2017, USD55/b in 2018 and USD60/b in 2019.RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
--If PDVSA is able to re-establish timely payments of its debt obligations in accordance with the original terms of the documents a positive rating action could occur
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
--A commencement of a bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure could result in a rating downgrade to 'D'.LIQUIDITY
PDVSA's liquidity position is expected to continue to weaken as a result of low oil prices and near-term debt service payments and transfers to the central government. As of December 2016, PDVSA reported cash of USD8 billion, which compared unfavorably with interest and principle payments of approximately USD9.8 billion due in 2017 and approximately USD5.0 billion in 2018. The company has made payments of approximately USD9.0 billion during 2017, although it delayed interest payments in more than one occasion to use the grace period provided under the indentures.
The company's current liquidity position is uncertain given expenditures, transfers to the government, and interest and principal debt payments that might have driven down liquidity from the last reported amount. Under Fitch's base case scenario, which assumes WTI oil prices of USD50/bbl in 2017, PDVSA's liquidity position will continue to deteriorate. Venezuela's gross international reserves continued to decline and as of end of October they amounted to approximately USD10.2 billion. FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
Petroleos de Venezuela, S.A.
--Long-Term Foreign Currency IDR downgraded to 'RD' from 'C';
--Long-Term Local Currency IDR downgraded to 'RD' from 'CC';
--National Scale long-term rating downgraded to 'RD(ven)' from 'CCC(ven)';
--Senior unsecured notes affirmed at 'C'/'RR4';
--Senior secured notes due 2020 affirmed at 'C'/'RR4'.