By John Wiske
& Paula Bunn
NEW YORK -- Fitch Ratings has affirmed Petroleos de Venezuela S.A.'s (PDVSA) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'RD'. Fitch has also affirmed PDVSA's National scale rating at 'RD(ven)', and has affirmed PDVSA's senior secured issuance at 'C'/'RR4'. In addition, Fitch has affirmed PDVSA's senior unsecured notes at 'C' and revised the recovery rating to 'C/RR5' from 'C/RR4'.
PDVSA's ratings reflect continued non-payment of financial obligations related to its senior unsecured notes, currently in default. PDVSA's ratings reflect the company's weakening liquidity position as a result of transfers to the central government, material principal and interest payments due in 2017, which were not able to be refinanced and low hydrocarbon price environment. PDVSA's credit quality continues to reflect its close linkage to the government of Venezuela, also rated 'RD', as a state-owned entity, combined with absolute government control over business strategies and internal resources. This underscores the close link between the company's credit profile and that of the sovereign. PDVSA's cash flow generation has historically been significantly affected by the large funds transfers to the central government.
The 'RR4' recovery rating on the secured notes is supported by the value of the company's collateral and the relative likelihood that bondholders will be able to execute on it, given the U.S. jurisdiction governing Citgo's (subsidiary of PDVSA) assets. The 'RR5' recovery rating on the unsecured notes reflects both Venezuela's weak systemic governance and the continued unwillingness or inability of PDVSA or the government of Venezuela to engage with bondholders to formally initiate restructuring proceedings.
Venezuelan government external reserves amounted to USD8.4 billion as of September 2018 versus USD10.9 billion a year-end 2017. PDVSA's most recent published financial statements are for December 2016, at which time it reported cash on hand of approximately USD8.3 billion. Venezuela has additional foreign exchange (FX) liquidity in government-managed funds, but these have likely declined and remain opaque in their administration and execution. KEY RATING DRIVERS
Uncertain Liquidity Position: In 2018, PDVSA has not paid interest or principal on any of its unsecured obligations, although it recently made its payment on the senior secured bond due 2020, which consisted of approximately USD107 million of interest and USD842 million of principal. Historically, the company's annual interest and principal obligations totalled nearly USD10 billion against a 2016 year-end cash balance of USD8.3 billion.
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 displays similar characteristics, which reinforces the linkage of its ratings to the sovereign.
Average Recovery: PDVSA's 'C' rating suggests a default or default-like process has begun. If a default or restructuring occurs, Fitch anticipates average recovery for PDVSA's bondholders of 31% to 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 senior secured notes also have an 'RR4' average Recovery Rating, as the collateral provided may only marginally enhance recovery given default, which could still range from 31% to 50%.DERIVATION SUMMARY
PDVSA's rating linkage to the Venezuelan sovereign ratings is in line with the linkage present for most National Oil and Gas companies (NOCs) in the region, including Pemex (BBB+ IDR), Ecopetrol (BBB IDR), Petrobras (BB IDR), PetroPeru (BBB+ IDR), Enap (A IDR). In most cases in the region, NOCs are of significant strategic importance for energy supply to the countries were they operate as is the case in Mexico, Colombia, Venezuela and Brazil. NOCs can also serve as a proxy for federal government funding as in Mexico and Venezuela and have strong legal ties to governments through their majority ownership, strong control and at times governmental budgetary approvals.
On a stand-alone (SA) basis, PDVSA's credit profile is somewhat more difficult to assess than other NOC yet Fitch believes it commensurate with a below 'CCC' rating category. This is several notches below the SA of all other NOCs in the region and it reflects the company's uncertain liquidity position, delay in payment of interest, lack of recent operational and financial information, and limited access to debt capital markets as a result of U.S. economic sanctions.KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
--WTI in line with Fitch's price deck, long-term mid-cycle price of USD55/bbl;
--Non-payment of interest or principal on all unsecured debt;
--All cash after secured financial obligations and capex paid as royalties and social contributions.RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
--If PDVSA is able to re-establish timely payments of its debt obligations in accordance with the original terms of the documents a positive rating action could occur.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
--A commencement of a bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure could result in a rating downgrade to 'D'. LIQUIDITY
The most recent year-end financial statements provided by PDVSA are for 2016, at which time the company's cash on hand totalled USD8.2 billiion against short-term amortizations and interest totalling nearly USD10 billion. It has subsequently defaulted on all its unsecured debt obligations, although it has maintained payments on its amortizing senior secured bond due 2020. 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. Fitch's base case scenario currently assumes that all cash after secured debt obligations and capex will be distributed to the government. FULL LIST OF RATING ACTIONS
Petroleos de Venezuela S.A.
--Long-Term Foreign Currency IDR affirmed at 'RD';
--Long-Term Local Currency IDR affirmed at 'RD';
--National Scale long-term rating affirmed at 'RD(ven)';
--Senior unsecured notes affirmed at 'C'; the recovery rating has been revised to 'RR5' from 'RR4';
--Senior secured notes due 2020 affirmed at 'C'/'RR4'.
‘RD’ ratings indicate an issuer that in Fitch Ratings’ opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased operating. This would include:
- the selective payment default on a specific class or currency of debt;
- the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation;
- the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or
- execution of a distressed debt exchange on one or more material financial obligations.