PdV pledges 100pc of Citgo in debt transaction

OREANDA-NEWS. February 12, 2015. Venezuelan state-owned PdV's US downstream subsidiary Citgo borrowed \\$2.8bn this week through Delaware-based Citgo Holdings, a new company created to facilitate a one-time dividend to its financially struggling parent firm.

The Citgo debt package included a \\$1.5bn five-year bond and a \\$1.3bn term loan to be fully repaid in three and a half years.

Citgo was forced to raise its offered interest rate for the \\$2.8bn package to about 12pc to entice reluctant investors, bond traders tell Argus.

Citgo also put up as collateral about \\$750mn of midstream storage terminal and pipeline assets, and pledged 100pc of Citgo Petroleum's equity – an increase from 49pc – to close the deal.

The \\$1.5bn bond issue was priced to yield 12.1pc to boost buyer interest, compared with average yields of about 8pc offered by Citgo's competitors in the US, the traders said.

Citgo also raised the interest rate on the \\$1.3bn loan portion of the financing package from 800 basis points to 825 basis points over Libor.

Citgo agreed to set aside sufficient funds to cover 12 months of principal and interest payments on the debt compared with six months originally.

The terms of the deal that closed this week stipulate that before Citgo can issue a dividend to PdV it must expand its debt service reserve to 18 months and reduce leverage to below two times earnings before interest, taxes, depreciation and amortization (Ebitda), according to traders familiar with the deal.

Investors should "not be concerned because Citgo Holdings will never default on the new debt," the Venezuelan energy ministry said.

But if unforeseen force majeure circumstances compel Citgo Holdings to default in the future, whoever acquires Citgo Petroleum would have to pay 101 cents on the dollar, the ministry added.

Venezuela?s credit rating has tanked on growing expectations of a default on its debt.

Venezuela's economy is expected to contract by at least 7pc in 2015.

PdV has raised almost \\$5bn in cash during the past few weeks, including \\$1.9bn from the Dominican Republic's heavily discounted transaction to erase roughly \\$4bn in PetroCaribe debt.

PetroCaribe is a Venezuela?s regional oil supply facility, in which countries like the Dominican Republic receive crude oil and refined products on soft financial terms.

Venezuela's government and PdV have about a combined \\$11.4bn in debt principal and interest payments due in 2015, including a 1bn euro bond that comes due for payment in March.

But PdV's expectations of quickly securing the Citgo dividend could be delayed because of a US court case. Judge Caroline Baker of the 295th district court in Texas recently refused to grant ConocoPhillips? request for permission to depose Citgo over PdV's apparently now-scrapped plans to sell its US subsidiary. Counsel for ConocoPhillips has asked the Texas court to reconsider its refusal, arguing that Citgo is selling pipeline and terminal assets to securitize the new \\$2.8bn loan.

Citgo declined to comment.

The Venezuelan government nationalized the local oil assets of ConocoPhillips in 2007, with no compensation. The company is awaiting a ruling from the International Center for Settlement of Investment Disputes (Icsid) in the case. US attorneys familiar with the dispute tell Argus that Icsid could award ConocoPhillips up to \\$4.5bn because its nationalized Venezuelan assets were "significantly greater" in 2007 than any other foreign oil company in the country.

There was no immediate comment from ConocoPhillips.

ExxonMobil was awarded \\$1.6bn in October 2014, but the money has yet to be paid by the Venezuelan government.