By Richard M Langberg
& Michael T Ferguson, CFA, CPA
Standard and Poor's
- Citgo Petroleum Corp. and its parent, Citgo Holding Inc. (CITGO), are 100% indirectly owned subsidiaries of Petroleos De Venezuela S.A. (PDVSA), the state-owned oil company of Venezuela. Venezuela is facing a political crisis that has significantly crippled the country's economy and, along with continued low oil prices, severely weakened the credit profile of PDVSA.
- In November 2017, we lowered the corporate credit rating on PDVSA to 'SD' (selective default) from 'CCC-', following missed interest payments on two series of bonds. We also lowered the rating on those two issues due 2027 and 2037 to 'D'.
- We also lowered the long-term foreign currency rating on Venezuela to 'SD' from 'CC' in November 2017. At the same time, we lowered the rating on two series of global bonds due 2025 and 2026 to 'D' from 'CC' for failure to make an interest payment on the bonds. While the government of Venezuela does not explicitly guarantee its obligations, PDVSA's role is critical to the government because it contributes approximately 50% of Venezuela's revenue and more than 90% of the country's exports.
- While the rating on CITGO is affected by the rating on its parent, PDVSA, we assess CITGO as an "insulated subsidiary" under our Group Rating Methodology criteria, and we believe the company would not be dragged into a bankruptcy of PDVSA should it occur. The insulation results in the ratings on CITGO being somewhat higher than those on PDVSA. The stand-alone credit profile (SACP) on CITGO is 'b+'.
- On Nov. 21, 2017, Venezuelan President Nicolas Maduro announced the arrest of six CITGO executives, including the acting CEO, who were in Venezuela for meetings at PDVSA, on allegations of embezzlement as part of a crackdown on corruption. He has since named a new CEO and installed a new head of PDVSA as well.
- We are placing our ratings on CITGO Petroleum and CITGO Holdings on CreditWatch with developing implications because we feel these actions could potentially threaten the separation between CITGO and PDVSA and jeopardize the insulated subsidiary assessment.
NEW YORK -- S&P Global Ratings said today it placed its ratings on CITGO Holdings Inc. and CITGO Petroleum Corp. on CreditWatch with developing implications. The developing designation means that the potential impact on the ratings of CITGO Holdings and CITGO Petroleum could be positive, negative, or unchanged but that it is unclear at this time.
S&P Global Ratings has placed its ratings on CITGO and CITGO Petroleum on CreditWatch with developing implications because of heightened uncertainty regarding the separation between CITGO, which has a stand-alone credit profile of 'b+', and its parent PDVSA, which is rated 'SD'. We have selected CreditWatch with developing implications because there are potentially both negative and positive rating actions that we might take on CITGO based on how the situation in Venezuela evolves. While the eventual rating action we might take is very hard to predict, we believe that it is somewhat more likely to be negative than positive.
The basis of our 'B-' corporate credit rating on CITGO is its designation as an "insulated subsidiary" of PDVSA under our Group Rating Methodology. This assessment means that CITGO is fundamentally separate from PDVSA and would not be included in the estate of PDVSA should it file for bankruptcy protection.
CreditWatch with developing implications means that there is high likelihood of a rating action, either negative or positive, within the next 90 days.
Events that would lead to a negative rating action would include PDVSA seeking bankruptcy protection that a court agrees must include CITGO or the government of Venezuela takes action that has a negative impact on the operational capability of CITGO, such as forcing an asset sale that alters the cash flow profile of the company. While the relevant credit documents governing CITGO's debt greatly limit any sale of assets and payment to PDVSA of the resulting proceeds, PDVSA's 100% control of CITGO and extremely difficult financial position provide incentive for PDVSA to try to monetize assets at CITGO in some way.
Given the immediate need for cash in Venezuela, there is a chance that PDVSA may seek to sell CITGO that would lead to an upgrade, at least to its current stand-alone credit profile of 'b+' and potentially higher depending on the linkage between CITGO and the buyer.
Given the overhang of PDVSA's ownership and the current political situation in Venezuela, we believe that there is a somewhat great likelihood of a negative rating action than a positive one. However, it is important to stress that it is difficult to know with any certainty what is happening in Venezuela, the motivations of the relevant parties, and any potential end game.