TEXT-Moody's cuts Merey Sweeny bonds rating to Baa3
<a href=reuters.com>Reuters Wed June 11, 2003 01:32 PM ET (The following statement was released by the rating agency)
$350 Million of Debt Affected
NEW YORK, June 11 - Moody's Investors Service downgraded the rating for the 8.85% senior bonds of Merey Sweeny L.P. (MSLP) and Sweeny Funding Corp. to Baa3 from Baa2. The rating outlook is stable. The rating downgrade reflects the rising financial leverage exhibited by the partnership and the increased political risk associated with its 50% indirect owner, Petroleos de Venezuela (PDVSA).
MSLP is a joint venture owned 50% by PDVSA, which is rated Caa1 for its foreign currency obligations, and 50% by ConocoPhillips (COP), rated A3 senior unsecured. A high level of pre-completion distributions to the shareholders and reduced processing fees have reduced MSLP's book equity in 2001 and 2002. Distributions are allowed prior to completion because of sponsor joint-and several guarantee of debt service. The project paid substantial distributions in 2001 and 2002 and is expected to resume at a high earnings payout level post-completion, subject to a minimum debt service coverage test. A severe squeeze on MSLP's processing fees and earnings throughout most of 2002 has also affected the project's equity cushion. The processing fee is tied to a formula that reflects price differentials between West Texas Intermediate and Mayan crude. The light/heavy differentials are highly volatile and shrank in 2002 when OPEC production cuts were implemented.
Despite a benefit from widening light/heavy crude differentials in 2003, MSLP has also been affected by the national strike in Venezuela, which disrupted crude exports to the U.S., including the heavy crude supplied by PDVSA under a long-term contract with COP. The refinery was able to run alternate crudes at a slight disadvantage during and following the strike, and MSLP's utilization and Venezuelan crude deliveries to COP have resumed and are expected to be normal in June 2003. However, the supply disruption highlights MSLP's dependence on Venezuelan crude and potential future supply risk to the project. In addition, PDVSA has certain financial obligations to the partnership, including potential cash calls to meet operating cash flow shortfalls, which have a higher level of risk as reflected in PDVSA's current Caa1 cross border long-term currency rating.
Despite the impact of PDVSA's political risk on the project rating, MSLP's long term debt continues to be rated Baa3 with a stable outlook, incorporating the strategic importance and integration of the project to COP and numerous mechanisms in place that tie the investment strongly to COP. Merey Sweeny is economically and physically integrated with the Sweeny refinery, and other linkages include COP's call right to buy out PDVSA's stake at a discount if PDVSA defaults, and its several pro-rata cash call as needed. The Baa3 rating and stable outlook reflect MSLP's expected financial completion in 2003, which is still subject to certain environmental permits, at which time the sponsors' joint and several guarantees of MSLP's debt service will be extinguished.
MSLP is a 50/50 joint-venture owned indirectly by ConocoPhillips, a major integrated oil company headquartered in Houston, Texas, and by Petroleos de Venezuela, the state oil company of Venezuela.