Venezuela's national oil and gas company Petroleos de Venezuela, S.A. announced a debt exchange offer, which we would view as a distressed exchange, if completed. Under the proposed transaction, the company would exchange its outstanding 5.25% and 8.5% senior unsecured notes due 2017 for new 8.5% senior secured notes due 2020. "We're lowering our corporate credit rating on PDVSA to 'CC' from 'CCC'. At the same time, we're lowering our issue-level ratings on its $3.0 billion 5.25% senior unsecured notes due April 2017 and on its $4.1 billion 8.5% senior unsecured notes due November 2017 to 'CC' from 'CCC'. The outlook is negative, reflecting a downgrade potential if the company completes the exchange offer, which we classify as tantamount to default. If PDVSA completes the exchange offer, we will lower the corporate credit rating to 'SD' and the issue-level ratings on the 2017 senior unsecured notes to 'D'."
By Marcela Duenas
& Fabiola Ortiz
S&P Global Ratings
MEXICO CITY -- Standard & Poor's (S&P) Global Ratings lowered its corporate credit rating on Petroleos de Venezuela S.A. (PDVSA) to 'CC' from 'CCC'. At the same time, we lowered our issue-level ratings on the company's $3.0 billion 5.25% senior unsecured notes due April 2017 and on its $4.1 billion 8.5% senior unsecured notes due November 2017 to 'CC' from 'CCC'.
The outlook remains negative.
The downgrade follows PDVSA's announcement to exchange its existing $3.0 billion senior unsecured notes due April 2017 and its $4.1 billion senior unsecured notes due November 2017. Under the offer, PDVSA will exchange both 2017 senior unsecured notes at par, for approximately $7.1 billion 8.5% senior secured notes due 2020. The new notes will be guaranteed by 50.1% of equity shares in PDVSA's refining unit, Citgo Holding Inc.
We view the transaction as a distressed exchange. While the exchange would be made at par value, the timing of payments will be delayed with the extension of the maturity date of the new notes. Also, we view the offer as distressed rather than purely opportunistic, given the current challenging operating conditions and the significant upcoming debt maturities that PDVSA faces, which would very likely lead to a conventional default when the existing notes come due.
According to S&P's ratings definitions, "an obligor rated 'CC' is currently highly vulnerable. The 'CC' rating is used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default."