If the PDVSA offer, which has been extended to October 21, expires without the use of CITGO Holding Inc. (HOLDCO, Long-Term IDR 'B-') stock as collateral, Fitch anticipates minimal effect on existing CITGO ratings. On the other hand, if the PDVSA debt exchange does go through as proposed, the ratings linkage between CITGO and parent PDVSA could be strengthened. Potential changes to CITGO's ratings will be based on Fitch's assessment of changes in linkage between PDVSA and CITGO based on the final terms of any exchange or agreement, particularly with regard to a stronger legal connection between the two, as well as the likelihood that triggering the change in control provision would heighten CITGO's probability of default.
Under the original terms of a debt exchange announced on Sept. 16, 2016, PDVSA expected to issue new 8.5% sinking notes due 2022 under a voluntary exchange for two existing bonds: a 8.5% sinking bond with $2.05 billion principal payments due in November 2016 and November 2017 and a $3.0 billion 5.25% bond due in 2017. The exchange offer has the potential to increase CITGO bondholders' exposure to PDVSA default risk through the use of 50.1% of HOLDCO stock as collateral for the new PDVSA notes. However, the situation remains fluid, terms are subject to change and successful execution is questionable. On Oct. 6, ConocoPhillips filed a complaint in Delaware district court under the Delaware Uniform Fraudulent Transfer Act (DUFTA), which could affect the debt exchange's appeal to lenders, as well as PDVSA's ability to offer HOLDCO equity as collateral.
PDVSA has extended the expiration deadline multiple times, most recently without changing other key terms, after receiving "substantially less" than the 50% minimum acceptance threshold for consummation. Absent an increase in consideration or other change in terms, Fitch believes the exchange offer is less likely to be successful.
Longer term, Fitch believes that in the event of a PDVSA default, PDVSA bondholders may not be successful in attempts to persuade Delaware courts to ignore the corporate separateness of PDVSA and its Delaware entities and attach CITGO assets. However, the potential for arbitral settlements and protracted litigation against PDVSA and Venezuela pose additional risks, primarily related to change-of-control considerations.
Given CITGO's size, asset positioning, cash flow potential, and other factors, Fitch informally estimates that, on a stand-alone basis with no parental rating constraints, CITGO could be rated in the mid-to-high 'BB' range, and potentially investment-grade, depending on the company's capitalization following a change in control.