MOODY'S REVIEWS PDVSA FINANCE AND OTHER ENTITIES LINKED TO PETROLEOS DE VENEZUELA FOR POSSIBLE DOWNGRADE
Moody's Investors Service placed under review for downgrade the following entities linked to Petroleos de Venezuela, the state oil company of Venezuela: PDVSA Finance Ltd., rated A3; PDV America Inc., rated Baa3; and four separate project financings, including Petrozuata Finance Inc. and Cerro Negro Finance Ltd., both rated Baa2, and Sincrudos de Oriente SINCOR C.A. and Fertinitro Finance Inc., both rated Baa3.
Moody's rating review is prompted by concerns over the Chavez regime's recent actions to more directly control PDVSA and their impact on the state oil company's governance and fundamental credit quality. The most recent senior management changes indicate that PDVSA is being transformed at the highest levels to become more of an instrument of the state in ways that could be detrimental to the company's operations and financial health.
Moody's notes that PDVSA's cross border rating is B2 and is not currently under review given the constraint of Venezuela's B2 sovereign foreign currency ceiling and the level of Venezuelan political and financial risk already factored into the parent company rating. One of the historical underpinnings of Moody's ratings for entities linked to PDVSA, all of which exceed Venezuela's B2 sovereign ceiling, has been the state oil company's relative independence in steering its course in significant matters ranging from corporate strategy, capital spending, and upstream development and production to commercial relations, balance sheet management, and earnings retention. Related to this view is the assumption that PDVSA's importance to the state would insulate the company and allow it to operate unimpeded in international commercial and financial markets, somewhat more akin to a private company than a government entity.
The government's recent actions affecting PDVSA's corporate governance and management, as well as the economic and political pressures faced by the Chavez regime, have increased the risk that this independence could change dramatically in the coming years. Moody's review of PDV Finance and PDV America will focus on whether the risks posed for parent PDVSA's future operational direction and fundamental credit quality warrant a continued spread in the subsidiaries' respective ratings, notwithstanding significant oil export receivables generation and structural and legal protections in the case of A3 rated PDV Finance, and significant covenant and asset protection in the U.S. based refining and marketing assets of Baa3 rated PDV America. At this time, Moody's is also confirming the Baa2 long-term debt ratings of Citgo Petroleum, a wholly owned subsidiary of PDV America, reflecting the subsidiary's satisfactory operating performance, the cash flow protection provided by its U.S. asset base, and its covenant protection. PDVSA's continued ownership of PDV America and Citgo and their strategic importance to PDVSA remain an open question for the Chavez regime.
In the case of the various project financings related to the upgrading of heavy oil and fertilizer production, Moody's will re-assess their strategic importance to PDVSA, whether there is increased risk of interference in their operation and completion that could impair debt holder protection, and whether PDVSA's fundamental ability to meet its own project obligations will be compromised. Moody's will also assess any changes in the economic profile of the projects, including the impact of potential cost overruns, which have become significant for Petrozuata in particular, but could also become problems for the other projects.
Petroleos de Venezuela, the state oil company of Venezuela, is headquartered in Caracas.
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