Fitch Downgrades PDVSA's IDRs to 'CC'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Petroleos de Venezuela S.A.'s (PDVSA) long-term foreign and local currency issuer default ratings (IDRs) to 'CC' from 'CCC' and the company's National scale long-term rating to 'CCC(ven)' from 'AA(ven)'. Fitch has also downgraded the long-term rating for approximately USD30 billion of senior unsecured debt outstanding to 'CC/RR4' from 'CCC/RR4' and the expected rating for the company's proposed senior secured notes to 'CC(EXP)/RR4' from 'CCC(EXP)/RR4'.

KEY RATING DRIVERS

The rating action follows PDVSA's announcement last Oct. 17, 2016 that it could be difficult for the company to make scheduled payments on its existing debt if a recently announce debt exchange was not successful. This announcement highlights PDVSA's low liquidity and Fitch's perception that company's ability to service its debt has deteriorated. The company announced on Oct. 24, 2016 that it had received and accepted tenders for USD2.8 billion of the offered USD5.3 billion of principal.

Despite the partial success of the exchange offer, PDVSA's liquidity position is weak and the company could still face difficulties making scheduled payments. The debt exchange was aimed at improving the company's amortization schedule as it faced approximately USD7.1 billion of principal payments for cross border bonds over the next 12 months. With the results of the exchange, the company's principal payments over the next twelve months amount to approximately USD6.1 billion as PDVSA expects to exchange USD2.8 billion of upcoming maturities for USD3.4 billion of new senior secured notes it intends to issue on Oct. 27, 2016. The new notes will have four equal principal amortizations starting in 2017 and until 2020.

Although Fitch continues to expect that PDVSA will receive financial aid from the Venezuelan government to make its upcoming principal payments, the company's claim that it could be difficult to make scheduled payments on its existing debt increases uncertainty about the company's liquidity. Venezuelan government external reserves amounted to approximately USD12 billion as of the end of September 2016, of which USD7.7 billion were in gold and USD4.4 billion were in hard currencies. PDVSA's cash on hand as of Dec. 31, 2015 amounted to approximately USD5.8 billion. The Venezuelan government does not have cross border principal payments until 2018 and its interest expenses average approximately USD3.0 billion per year.

LINKAGE TO SOVEREIGN

PDVSA's credit quality continues to be linked to that of the Venezuelan government. Venezuela's ratings (IDR 'CCC') reflect the sovereign's weakened external reserves, high commodity dependence, rising macroeconomic distortions, limited reduced transparency in official data, and continued policy and political uncertainty. The sovereign's strong repayment record and relatively low debt amortization profile mitigate imminent risks to debt service. PDVSA is fully owned by the government and its transfers have historically represented around 45% of the government's revenues. It is of strategic importance to the economic and social policies of the country, as oil accounts for around 95% of total exports.

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 also displays similar characteristics, which reinforces the linkage of its ratings to the sovereign.

FOCUS SHIFTS TO RECOVERY

PDVSA's 'CC' rating suggests that default of some kind appears probable. If a default or restructuring occurs, Fitch anticipates average recovery for PDVSA's bondholders of 31%-50%, and likely closer to the lower end of the range. While Fitch's recovery analysis yields a high recovery, the willingness of Venezuela's government to extend concessions to investors will likely move actual recovery closer to the lower end of the 31% to 50% range. In addition, should oil prices remain depressed, an average recovery may lead to additional future defaults in order to further reduce obligations and allow for necessary transfers to the government. The proposed senior secured notes have also been assigned an 'RR4' average Recovery Rating as the collateral provided may only marginally enhance recovery given default, which could still range between 31% and 50%.

KEY ASSUMPTIONS

Linkage to government: PDVSA's ratings assume that implicit support from the government, given the company's strategic importance, would likely materialize should the company need it.

Slow hydrocarbon price recovery: Fitch assumes West Texas Intermediate crude prices to average approximately USD42 per barrel in 2016 and to slowly recover to approximately USD65 per bbl in the long term.

Stable Production: PDVSA's ratings assume the company's production will remain relatively flat or decline marginally over the rating horizon.

RATING SENSITIVITIES

Catalysts for a downgrade include non-payment of a financial obligation, or a downgrade to Venezuela's ratings. Although not expected in the short- to medium-term, catalysts for an upgrade include a stabilization in the company's liquidity position and improvement in the short-term debt maturity profile, or an upgrade to Venezuela's sovereign rating.

LIQUIDITY

PDVSA's liquidity position is expected to continue to weaken as a result of the unsuccessful exchange offer and recent and near-term debt service payments, current low oil price environment and transfers to the central government. As of December 2015, PDVSA reported cash of USD5.8 billion, which compared unfavorably with estimated principal payments of approximately USD6.1 billion over the next twelve months. The company's current liquidity position is uncertain given expenditures, transfers to government, and interest and principal debt payments that might have driven down liquidity from the last reported amount as of year-end 2015. Under Fitch's base case scenario, which assumes oil prices of USD42/bbl in 2016 and USD45/bbl in 2017, and investments of USD25 billion annually, PDVSA's liquidity position will continue to deteriorate. Venezuela's gross international reserves have declined by USD4.3 billion to USD12 billion between January and September 2016.

FULL LIST OF RATING ACTIONS

Fitch downgraded the following ratings

Petroleos de Venezuela, S.A.

--Foreign Currency Long-Term IDR downgraded to 'CC' from 'CCC';

--Local currency long-term IDR downgraded to 'CC' from 'CCC';

--National Scale long-term Rating downgraded to 'CCC(ven)' from 'AA(ven)';

--Sr. unsecured notes downgraded to 'CC/RR4' from 'CCC/RR4';

--Sr. secured notes due 2020 expects to assign a 'CC(EXP)/RR4'.

Date of Relevant Rating Committee: Oct. 24, 2016.

Additional information is available at www.fitchratings.com

Applicable Criteria

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

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

Distressed Debt Exchange (pub. 08 Jun 2016)

https://www.fitchratings.com/site/re/882737

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013724

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013724

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

View source version on businesswire.com: http://www.businesswire.com/news/home/20161025006741/en/

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jorge Yanes
Director
+57 1 484 6770 Ext. 1016
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Need to Know: EU's New Rules on Environmental Claims
• After 50 Years in the Law, James Gray Robinson, Esq. Launches Beyond Lawpreneur, a Firm-Building Platform for Attorneys Who Are Tired of Being the Bottleneck
• FINRA Announces Results of Board of Governors Elections