PDVSA Swap Seen Distressed, Positive for Venezuela: Moody’s

(Bloomberg) -- The proposed bond swap by Venezuela’s state-owned oil company will probably be characterized as distressed and considered a credit event while still being positive for the sovereign’s debt, Moody’s Investors Service said.

Petroleos de Venezuela SA wants investors to swap $7 billion of bonds maturing in April and November next year for new 8.5 percent notes with payments staggered over the next four years. If the participation rate is 50 percent or higher, that would materially reduce the risk of the sovereign defaulting in the next 12 months by avoiding a disorderly default from PDVSA, which has more near-term maturities than Venezuela, Moody’s said.

“From a sovereign credit standpoint, PDVSA’s exchange is credit positive for Venezuela because at a time of severe external liquidity stress, it frees up hard currency that the government can use for other payments, including its own debt service,” analysts Jaime Reusche and Anna Snyder wrote in the report. Moody’s still has to determine if the exchange will be considered distressed, but is likely to do so and thus to also consider it a credit event, the report said.

A PDVSA default would also potentially lead to complicated litigation that may compromise Venezuela’s ability to pay its own debt, the report said.

S&P Global Ratings downgraded Venezuela’s state oil company on Sept. 19 and said if the bond swap is carried through it would be “tantamount to default.”

Citgo Review

Separately, Fitch Ratings has placed Houston-based Citgo Petroleum Corp. and Citgo Holding Inc. on negative watch after PDVSA’s announcement.

Citgo has three refineries in the U.S. that can process more than 750,000 barrels of oil a day. The company distributes gasoline, diesel and other fuels through wholesale terminals from Texas to Maine and more than 6,000 retail stations, according to its website.

If successful, the debt exchange offer could increase Citgo bondholders’ exposure to PDVSA default risk with over 50 percent of Citgo Holding stock being used to back the new notes.

PDVSA has valued Citgo at $8.3 billion, a figure that has been questioned by analysts as being too high. BancTrust estimated the value net of debt at $4.26 billion to $5.38 billion in a note Wednesday.