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Venezuela's Citgo teetering on brink of default, Fitch warns in downgrade

Venezuelan-owned Citgo Holding Inc. is at severe risk of default as the country founders under heavy debt, Fitch Ratings said in a recent update of the oil company's creditworthiness.

Fitch announced its downgrade of Citgo's issuer default rating from B- to CCC, or an extremely high-risk investment one step from default. The rating agency listed severe political turmoil as one of the major reasons for the decision.

"Recent associated headline risks include the impact of U.S. sanctions on Venezuela; the arrests of a number of CITGO executives in Venezuela on corruption charges; and payment defaults by [parent Petroleos de Venezuela]," Fitch said.

With a loan of more than $600 million due to be paid off by May 2018, it appears Citgo will either have to renegotiate the terms of the deal or default. "Fitch believes the key risks to CITGO creditors relate to refinance risks and potential change of control issues, which could be driven by further defaults by parent PDVSA or the ultimate outcome of pending litigation and arbitral awards against PDVSA," Fitch said.

The meddling of PDVSA — a government agency under embattled President Nicholas Maduro — has the U.S. rating agency concerned about Citgo's ability to find continued financing. "While Fitch believes Citgo would likely have the ability to either obtain lender consents or refinance the existing debt package, external events including capital market shocks or difficulty reaching consensus amongst a diverse bondholder group could impair the company's ability to do so within the applicable repurchase windows," it said. "Recent events involving PDVSA also serve to complicate the situation, and could influence investors' perceptions of the debt."

Fitch said Citgo, which has been completely owned by Venezuela since 1990, would be in significantly better shape if it were sold. The company is one of the few profitable assets held by the Venezuelan government, which is facing unemployment estimated to be above 20%, skyrocketing inflation and mounting debt of an estimated $89 billion.

"Given CITGO's size, asset positioning, and cash flow potential, Fitch informally estimates that, on a stand-alone basis with no parental rating constraints, that CITGO could be rated significantly higher than its current rating. Parent-subsidiary linkage and ties with PDVSA are the key constraints on the current rating," Fitch said.