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Rating Action:

MOODY'S REVIEWS FOR DOWNGRADE PETROLEOS DE VENEZUELA (PDVSA) A3 LOCAL AND Baa3 FOREIGN CURRENCY RATINGS AND Baa1 LONG-TERM RATING OF PDVSA FINANCE; CONFIRMS AND COMMENTS ON RATINGS OF OTHER LINKED ENTITIES (HAMACA Baa3 PROJECT RATING OUTLOOK CHANGED TO NE

28 Feb 2002
MOODY'S REVIEWS FOR DOWNGRADE PETROLEOS DE VENEZUELA (PDVSA) A3 LOCAL AND Baa3 FOREIGN CURRENCY RATINGS AND Baa1 LONG-TERM RATING OF PDVSA FINANCE; CONFIRMS AND COMMENTS ON RATINGS OF OTHER LINKED ENTITIES (HAMACA Baa3 PROJECT RATING OUTLOOK CHANGED TO NE

New York, February 28, 2002 -- Moody's Investors Service placed under review for possible downgrade Petroleos de Venezuela S.A.'s (PDVSA) A3 local currency issuer rating and the Baa3 foreign currency debt ratings of PDVSA and its guaranteed subsidiary, Bariven. The review for downgrade reflects concerns over the Venezuelan government's growing fiscal problems and their encroachment on PDVSA's financial and operating autonomy, as well as concerns over the strategic and financial implications of recent changes in PDVSA's board of directors and senior management. In related actions, Moody's placed PDVSA Finance Ltd.'s Baa1 senior unsecured debt rating under review for downgrade. It also confirmed various other PDVSA linked obligations, including its project financings, PDV America, Inc. (Baa3) and CITGO Petroleum Corporation (Baa2).

Moody's changed its rating outlook for Venezuela's B2 foreign currency country ceiling to negative on February 27, 2002, signaling heightened concern over the impact of the new floating exchange rate regime on the country's foreign currency reserves, even as the government faces large financing requirements to fund its budget deficit and social programs in 2002. As these financial pressures mount, the risk of additional government calls on PDVSA's cash flow and foreign exchange generation are increasing. While it is not clear whether President Chavez will continue to support OPEC's oil price and production goals, he has consolidated his control over PDVSA, most recently appointing Gaston Parra as the company's new president and replacing most of PDVSA's board of directors.

Moody's rating review of PDVSA's A3 local currency rating will focus on the disposition of newly-appointed President Parra and the board with regard to PDVSA's future strategic direction and financial policies; the government's potential call on PDVSA's cash flow in 2002 and beyond in a deteriorating economic environment; the implications of the new Hydrocarbons Law for PDVSA's dividends, royalties and taxes; the cash flow and operating impact of the recent proposed 28% cut in PDVSA's 2002 capital budget; and the near and longer term effects of the capital cuts and other potential de-capitalization on PDVSA's and Venezuela's oil production capacity.

The review of PDVSA's Baa3 foreign currency debt ratings will be linked to the outcome of the A3 local currency review. The bonds and medium term notes were upgraded in October 2001, reflecting Moody's revised approach to rating certain corporate debt above the foreign currency ceiling. The approach involves joint-probability analysis of a general debt moratorium in Venezuela and the likelihood that PDVSA would be subject to such an event affecting its cross border debt.

The Baa1 senior unsecured debt rating of PDVSA Finance Ltd. was also placed on review for a possible downgrade. With PDVSA's cash flow increasingly subject to government pressures and foreign investment under pressure going forward, the review reflects heightened concern over generation risk, or PDVSA's ability to continue to produce and ship crude oil to its North American customers at levels sufficient to maintain debt service coverage measures consistent with the notes' current rating. In addition, although Moody's believes that the structure benefits from several features that help mitigate the overall likelihood of diversion by the Venezuelan government of cash or crude, a potential downgrade in the foreign currency rating of PDVSA or of Venezuela could signal increased risk of government interference and may impact the rating of the notes.

The ratings on the five major projects in Venezuela currently are not expected to be similarly affected. Moody's confirmed four of the project ratings with a stable outlook: Cerro Negro (Baa2), Petrozuata (Baa2), Sincor (Baa3) and Fertinitro (Baa3), which are effectively completed and earning varying levels of revenues and significant foreign exchange for the project sponsors, including PDVSA. It also confirmed the Hamaca project's Baa3 rating, but changed the outlook to negative. Moody's believes, despite concerns over PDVSA's budget, that it would not be logical for President Chavez or for PDVSA to limit the minimal funding required to keep the largely completed projects moving forward. However, the Hamaca project is at an early stage of development and has significant capital expenditure requirements to achieve completion. The project to date has only financed 30% of its expected $4 billion cost and a large portion of the funds must come from the sponsors.

In related actions, Moody's confirmed with a stable outlook the Baa3 long-term debt rating of PDV America and the Baa2 long-term debt ratings of CITGO Petroleum Corporation. PDV America is a holding company whose principal assets are its stock in CITGO Petroleum and a mirror note receivable from a PDVSA affiliate, which provides all debt service on PDV America's $500 million of senior notes, due August 2003. Moody's views the payment risk on that note as more akin to the transfer risk implicit in PDVSA's other cross border debt. To date, PDVSA has paid timely all obligations under those notes. PDV America also benefits from dividends and the indirect cash flow and asset protection provided by Citgo, which is one of the largest independent refiner/marketers in the United States. CITGO, likewise, continues to demonstrate satisfactory financial results and it does not appear that current force majeure reductions in crude deliveries under its supply contracts with PDVSA will unduly hurt its earnings. Moreover, although dividends are managed to maximize cash to PDV America, CITGO largely funds capital spending internally and has covenant protections on restricted payments in its bank debt and bond indentures. Moody's will monitor these entities for any change in these policies or in the government's disposition towards PDVSA's international refining and marketing investments.

Petroleos De Venezuela, the state oil company of Venezuela, is headquartered in Caracas, Venezuela.

New York
Susan D. Abbott
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Stephen G. Moore
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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