CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Ratings (IDR) for CITGO Petroleum Corporation (CITGO) to 'B' from 'BB-' and has downgraded the company's senior secured ratings (including the revolver, term loans, and fixed-rate industrial revenue bonds [IRBs]) from 'BB+' to 'BB/RR1.' The Rating Outlook has been revised to Stable from Negative.
The main catalyst for the downgrade at the CITGO level is the downgrade of CITGO's ultimate parent Venezuelan National Oil Company Petroleos de Venezuela (PDVSA) from 'B' to 'CCC' at the end of December.
Approximately $1.7 billion in debt (including capitalized leases) is affected by today's rating action. A full list of ratings follows at the end of this press release.
KEY RATINGS DRIVERS
CITGO's ratings are supported by the scale and quality of the company's refining assets, with three high-complexity refineries consisting of approximately 749,000 barrels per day (bpd) of refining capacity on the Gulf Coast and Midcontinent; significant access to price-advantaged Canadian and U.S. shale crudes, resulting in strong financial performance and free cash flow (FCF) before dividends; export capability out of the Gulf that allows it to access higher growth markets abroad; and strong covenant protections in the senior indenture, which limit the ability of CITGO's parent to dilute CITGO's credit quality.
LINKAGE TO WEAKER PARENT PDVSA
These positives are balanced by CITGO strong operational linkage to indirect parent PDVSA, which is evidenced through CITGO's contracts to take approximately 300,000 bpd of PDVSA crude at its Gulf coast refineries; frequent appointment of PDVSA personnel to CITGO executive and board positions; procurement services agreements between CITGO and PDVSA; and use of CITGO to upstream dividends to its parent (subject to a restricted payments basket in CITGO's secured debt covenants).
PDVSA DOWNGRADE
On Dec. 19, Fitch downgraded PDVSA to 'CCC' from 'B', following the downgrade of the Venezuelan sovereign's ratings to 'CCC'. PDVSA's downgrade reflected the company's linkage to the government of Venezuela as a state-owned entity, combined with increased government control over its business strategies and internal resources. PDVSA's cash flow generation is significantly affected by the large amount of funds transferred to the central government each year.
STRONG STAND-ALONE CREDIT METRICS
CITGO's credit metrics are strong for the rating category. As calculated by Fitch, at Nov 30, 2014, CITGO's total debt and capitalized lease obligations were approximately $1.7 billion. EBITDA declined moderately to $1.46 billion but remained at very good levels, resulting in debt/EBITDA leverage of just 1.2x and EBITDA/interest coverage of 11.4x. The company's LTM free cash flow declined sharply to -$1.12 billion, but this was driven by a large swing in working capital accounts linked to higher inventories (-$1.32 billion) and a distribution of $704 million. Absent these factors, the company would have been significantly FCF positive.
With regards to distributions to its parent, it is important to note that CITGO's restricted payment basket limits the company to distributing cumulative net income levels. Looking forward, Fitch expects CITGO will be modestly FCF positive in its base case in 2015.
LIQUIDITY
CITGO's liquidity was reasonable at Sept. 30, 2014 and totaled $891 million. This included $51.4 million in cash; $839 million in availability on its main secured $900 million revolver after borrowings and LOCs, and no availability on its A/R Securitization facility. The company's secured revolver expires in 2019, while its A/R Securitization facility, which has a maximum capacity of $450 million and is renewed annually, expires in 2015. In addition to this, CITGO has $290 million in repurchased Industrial Revenue Bonds (IRBs), which were held in Treasury and can be remarketed at the company's discretion. Additional liquidity could come from the liquidation of excess inventory. Headroom on key financial covenants was reasonable at Sept. 30 and included a debt-to-cap ratio of 41% (versus a 60% max). There was also ample headroom on the company's interest coverage covenant (minimum of 3.0x). Near-term maturities are light.
OTHER LIABILITIES
CITGO's other obligations are manageable. As of YE 2013, the deficit on the funded status of CITGO's Pension Benefit Obligation (Pension Assets - PBO) declined to -$192.7 million from -$353.5 million the year prior. The main sources of improvement stemmed from actuarial gains, and better returns on plan assets. CITGO's asset retirement obligation (ARO) was essentially unchanged at YE 2013 at $18.76 million and was primarily linked to asbestos remediation. Rental expense for operating leases rose to $170 million in 2013 and was comprised of leases for product storage, office space, marine chartered vessels, computer equipment and equipment used to store and transport feedstocks and refined products.
STRONG COVENANT PROTECTIONS
It is important to note that there are relatively robust covenant protections in CITGO's secured debt which restrict the ability of its parent to dilute CITGO's credit quality and help justify the rating differential between the two entities. Elements of this ring-fencing include a debt/cap maximum of 60%, with a lower 55% test for purposes of making distribution to the parent; and a restricted payment basket which limits the ability of CITGO to make distributions to its parent. There are no cross defaults or guarantees between CITGO and PDVSA, CITGO's assets are U.S. domiciled, and there are two Delaware Corporations between PDVSA and CITGO Petroleum Corporation.
Fitch also believes it would be challenging for CITGO to refinance its debt and thereby escape these covenants. In July of this year, CITGO completed a major refinancing of virtually all of its debt, which shares pari passu in the same security and has the same covenant package (revolver, term loan, notes, and fixed rate IRBs).
The notching between CITGO's IDR and secured ratings reflects the strength of the underlying security package, which was expanded in 2010 to include the 167,000 bpd Lemont refinery, in addition to CITGO's Lake Charles and Corpus Christi refineries, and select petroleum inventories and accounts receivables.
RATINGS SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Improved ratings at the parent level (PDVSA) or a change in ownership, as well as evidence that CITGO's strong financial performance will continue.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Further weakening in credit quality at the parent level;
--A sustained operational problem at one or more refineries;
--Weakening or elimination of key covenant protections contained in the senior secured debt through refinancing or other means.
This last action in particular would weaken the notching rationale between parent and subsidiary, as the ring fencing created by the secured debt covenants offer substantial protections to all CITGO debtholders.
Fitch has downgraded the following ratings:
CITGO
--IDR to 'B' from 'BB-';
--Senior secured credit facility to 'BB/RR1' from 'BB+';
--Secured term loans to 'BB/RR1' from 'BB+';
--Secured notes to 'BB/RR1' from 'BB+';
--Fixed-rate IRBs to 'BB/RR1' from 'BB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Fitch Downgrades PDVSA's IDRs to 'CCC' (Dec. 19, 2014);
--'Cash Flow Trends in the US Energy Sector (Shareholder Activism Having an Impact) (Feb. 4, 2014);
--'2015 Outlook: Crude Oil and Refined Products Pipelines (Dec. 16, 2014);
--'2015 Outlook: Global Oil and Gas (Dec. 15, 2014);
--'Scenario Analysis -- Lifting the Crude Export Ban' (Jan. 27, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
2015 Outlook: Crude Oil and Refined Products Pipelines (Positioned to Withstand Lower Commodity Prices)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=839808
2015 Outlook: Global Oil and Gas (U.S. Shale Balances Crude Market)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=834688
Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=966315
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