Fitch Affirms CITGO's Ratings Following PDVSA Exchange

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has removed from Rating Watch Negative and affirmed the ratings of CITGO Petroleum and CITGO Holding (HOLDCO) following the completion of PDVSA's (Long-Term IDR 'CC') debt exchange offer. As part of the exchange, PDVSA offered 50.1% of HOLDCO stock as collateral for $3.4 billion in new PDVSA senior notes. Fitch believes the key risks to CITGO creditors relate to potential change of control issues, which could be driven by a PDVSA default or the ultimate outcome of pending litigation and arbitral awards against PDVSA.

Ultimately, a change of control has the potential to relieve significant rating constraints on the CITGO structure. Mitigation of parent company risk would likely be a positive development from a CITGO lenders perspective, implying a greater likelihood of obtaining change of control consents. Fitch believes that the liquidity and refinancing risks following a change of control are manageable given underlying CITGO credit fundamentals and that these risks are embedded in current CITGO ratings. The Rating Outlook is Stable.

KEY RATING DRIVERS

PDVSA Ownership Key Rating Constraint

There is a relatively strong operational linkage between CITGO and parent PDVSA. This relationship is evidenced by a history of use of CITGO as a source of dividends to its parent, frequent placement of PDVSA personnel into CITGO executive positions, control of CITGO's board by its parent, and existence of a crude oil supply agreement. However, there are important legal and structural separations between the two entities.

CITGO is a Delaware corporation with U.S. domiciled assets and is separated from PDVSA by two Delaware C-Corps, CITGO Holding, Inc., and PDV Holding Inc. The most important factor justifying the rating notching between CITGO and PDVSA is the strong covenant protections in CITGO's secured debt, which limit the ability of the parent to dilute CITGO's credit quality. Key covenants include limitations on guarantees to affiliates, restrictions on dividends to HOLDCO and PDVSA, asset sales, and incurrence of additional indebtedness. CITGO debt has no guarantees or cross-default provisions related to PDVSA debt.

Change of Control Mechanics

In the case of a PDVSA default on the new senior notes due 2020, foreclosure on the equity collateral would likely trigger change of control provisions in existing CITGO debt. If CITGO was unable to obtain sufficient consents from lenders, the company would be obligated to make an offer to repurchase outstanding senior notes at 101. CITGO would have a 90-day repurchase window, providing some time to refinance the notes or otherwise raise sufficient liquidity. HOLDCO's $656 million term loan would be required to be repaid within three days of a change in control. A change on control would constitute an event of default under CITGO's revolving credit agreement and $639 million term loan. Lenders would have the option to accelerate the loans or provide change of control consent.

While Fitch believes CITGO would likely have the ability to either obtain lender consents or refinance the existing debt package, external events including capital market shocks or difficulty reaching consensus amongst a diverse bondholder group could impair the company's ability to do so within the applicable repurchase windows.

Separately, it is possible that parties to pending arbitration and litigation (ExxonMobil, ConocoPhillips, Crystallex, among others) against Venezuela and/or PDVSA would attempt to attach PDV Holding's remaining unpledged equity stake in HOLDCO, currently 49.9% following the recent debt exchange.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for CITGO include:

--No major capital projects over the forecast horizon with annual capex of $300 million;

--Regional crack spreads decline to normalized levels over the forecast horizon;

--No material increases in corporate SG&A and refining operating expense per barrel;

--CITGO Petroleum pays approximately 100% of net income to CITGO Holding as available under the restricted payments basket.

RATING SENSITIVITIES

CITGO PETROLEUM

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Weakening or elimination of key covenant protections contained in the CITGO Petroleum senior secured debt through refinancing or other means;

--A sustained operational problem at one or more refineries.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Improved ratings at PDVSA;

--Stronger structural separations between CITGO Petroleum and PDVSA leading to a wider notching rationale between the two;

--A change in ownership to a higher rated entity.

CITGO HOLDING

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Weakening or elimination of key covenant protections contained in CITGO Holding senior secured debt through refinancing or other means;

--Operational problems at CITGO Petroleum which negatively impacted the dividend stream to CITGO Holding.

Any change in existing covenant protections that weakened existing credit protections could change the rationale for notching between CITGO Petroleum and PDVSA, which could negatively impact the ratings at CITGO Holding.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Improved ratings at PDVSA or CITGO Petroleum;

--Stronger structural separations between CITGO Holding and PDVSA leading to a wider notching rationale between the two;

--A change in ownership to a higher rated entity.

LIQUIDITY

At June 30, 2016, CITGO Petroleum had approximately $913 million in available liquidity, consisting of $817 million in revolver availability, $29 million in cash, and $67 million in availability on the A/R facility. Fitch believes this will be adequate for near-term liquidity requirements in the ordinary course of business, which would consist primarily of working capital needs in the event of another large move in crude oil or product prices. Fitch expects that capex, dividends, and other calls on liquidity will be funded primarily with operating cash flows. CITGO Petroleum has no maturities until the term loan B due in 2021, with a remaining principle of $639 million. CITGO Holding's secured term loan B is due in 2018, with a remaining principle of $656 million. As of June 30, CITGO Holding has prepaid approximately $644 million of the term loan B through the excess cash flow feature of the credit agreement.

FULL LIST OF RATING ACTIONS

Fitch has removed from Rating Watch Negative and affirmed the following ratings:

CITGO Petroleum Corp.

--Long-term IDR at 'B';

--Senior secured credit facility at 'BB/RR1';

--Senior secured term loans at 'BB/RR1';

--Senior secured notes at 'BB/RR1';

--Fixed-rate industrial revenue bonds at 'BB/RR1'.

CITGO Holding Inc.

--Long-term IDR at 'B-';

--Senior secured term loans at 'B+/RR2';

--Senior secured notes at 'B+/RR2'.

The Rating Outlook is Stable.

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's financial statements.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)

https://www.fitchratings.com/site/re/886557

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/site/re/879564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013959

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013959

Endorsement Policy

https://www.fitchratings.com/regulatory

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