S&P cuts PDVSA Finance $3.6 bln notes rating
www.forbes.com Reuters, 01.10.03, 4:23 PM ET
(Press release provided by the rating agency) NEW YORK, Jan 10 - Standard & Poor's Ratings Services today lowered its ratings on the US$3.6 billion and Eur200 million senior unsecured notes of PDVSA Finance Ltd., a wholly owned subsidiary of Petroleos de Venezuela S.A. (PDVSA), to 'B-' from 'BB' (see list). The notes remain on CreditWatch, where they were placed Dec. 12, 2003.
The rating action reflects the heightened risk of default due to the ongoing strike that has crippled the oil industry in Venezuela and PDVSA Finance's ability to service its debt. The current rating on the notes reflects the funded liquidity account available to protect investors at least through the company's next debt service payment on Feb. 16, 2003. While the liquidity account, which is fully funded for the amount of this payment and under control of the New York Fiscal Agent, is available to cover that payment and structural enhancements are still in place to prevent sovereign or corporate interference with that payment, both the ability to generate and export oil and PDVSA's willingness to allow much needed export revenues to be trapped offshore have been severely affected by the strikes.
Standard & Poor's is concerned with the ability and willingness of PDVSA Finance to make subsequent debt service payments as long as PDVSA's operations remain hampered by its striking workers. After the February payment, PDVSA Finance's next debt service payment is in May 2003. While PDVSA Finance has indicated that is has adequate funds in its collection account for the February payment, these funds are not restricted and could be distributed to PDVSA assuming that various covenants are not breached. PDVSA Finance currently is in compliance with all covenants, however, there is still the risk of an eventual event of default due to a covenant violation, including one triggered by the company's low export volumes.
If the liquidity account is used to make the February payment and PDVSA Finance does not replenish the account within seven days, an event of default will be triggered. Investors have the option at that time of declaring an acceleration of the notes. If an acceleration event is declared, 100% of all collection deposited into the offshore account will be used to pay bondholders. If, however, funds in the liquidity account are not used to make the February debt service payment, then a payment default in May would be unlikely as the liquidity account would remain funded.
Standard & Poor's also is concerned about PDVSA's ability to restore its operations, which could result in diminished coverage ratios and strained liquidity for PDVSA Finance. Standard & Poor's believes that restoring PDVSA's production could require several months and substantial investment, but precise estimates are difficult at this time given the operational disarray at PDVSA.
Standard & Poor's notes that the May 2003 debt service payment could be serviced with only approximately five to six days of exports based on prestrike volumes (approximately 1.6 million barrels per day) and prices (approximately US$23.00 per barrel) of exports to the U.S. (80% of which must flow through the PDVSA Finance collection accounts). High political uncertainty in Venezuela and ramp-up requirements make it difficult to assess whether there will be even the partial resumption of meaningful export volumes by April, which would be required to provide enough cash flow to service the notes. Standard & Poor's also believes that PDVSA and the sovereign's sharply weakened financial condition has raised the likelihood that even once exports begin to resume, there may be cash flow diversion from the structured arrangements (this risk is exacerbated by the fact that most of the export volume will initially go to Citgo Petroeum Corp., the U.S. refiner and marketer that is 100% controlled by PDVSA, who purchased approximately 25% of prestrike U.S. export volumes).
To speak to an analyst directly regarding PDVSA Finance, please contact Nancy Gigante Chu, Structured Finance Ratings - Latin America, New York, (1) 212-438-2429; regarding PDVSA, contact Bruce Schwartz, Corporate Ratings, New York, (1) 212-438-7809; and regarding the rating action on the Bolivarian Republic of Venezuela, contact Richard Francis, Sovereign Ratings, New York, (1) 212-438-7348. RATINGS LOWERED AND REMAINING ON CREDITWATCH PDVSA Finance Ltd. Class Rating To From A 6.45% notes due 2004 B-/Watch Neg BB/Watch Neg B 6.65% notes due 2006 B-/Watch Neg BB/Watch Neg C 6.80% notes due 2008 B-/Watch Neg BB/Watch Neg D 7.40% notes due 2016 B-/Watch Neg BB/Watch Neg E 7.50% notes due 2028 B-/Watch Neg BB/Watch Neg F 8.75% notes due 2004 B-/Watch Neg BB/Watch Neg G 6.25% notes due 2006 B-/Watch Neg BB/Watch Neg H 9.40% notes due 2007 B-/Watch Neg BB/Watch Neg I 9.75% notes due 2010 B-/Watch Neg BB/Watch Neg J 9.95% notes due 2020 B-/Watch Neg BB/Watch Neg K 8.50% notes due 2012 B-/Watch Neg BB/Watch Neg
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