Friday, November 22, 2024

Venezuela Eyes Double-digit Yield on Citgo Debt Sale

Posted by January 23, 2015

Venezuela's US oil-refining unit Citgo will probably have to pay double-digit yields to lure investors into a US$2.5bn financing package aimed at pumping new cash into its state-owned parent PDVSA.
 
With some US$10bn in debt payments due this year, cash-strapped Venezuela is pledging some of its most valuable assets abroad to raise new cash, as it fends off default worries amid a steep slide in crude oil prices.
 
A US$1.5bn high-yield bond issue and a US$1bn senior secured five-year term loan will be sold through Citgo Holding Inc and secured by US$750m in midstream assets and a 49% pledge on the equity of Citgo Petroleum Corp, the operating entity.
 
Citgo has set price talk of 800bp over Libor on the five-year senior secured first-lien Term Loan B, officials from sole lead manager Deutsche Bank said on Thursday during a presentation to investors in New York.
 
The non-call one loan will have a Libor floor of 1% - meaning that the interest paid on the principal would be at least 9% - and will be issued at an original discount of 96-97 for an all-in yield of about 10%.
 
As an additional safeguard for investors, the company will be required to keep a debt service reserve account worth six months' of interest and principal payments, and use 75% of excess cashflow to pay down debt.
 
Bargaining Power
At a 10% yield, the loan - which will rank pari passu with the upcoming bonds - appears to offer a 275bp pick-up over Citgo Petroleum Corp's 6.25% 2022s notes, which were spotted trading at a yield of around 7.25% on Thursday.
 
Those notes had been quoted at a much lower 5.5% yield earlier in the week, but tanked by as much as eight points in cash terms after news of the financing package dashed hopes that Venezuela would sell the Citgo unit altogether.
 
At first glance, the premium appears close to the 200-250bp spread normally seen between debt issued by holding and operating companies in the high-yield market, but given Venezuela's desperate need for cash, potential buyers might have the upper hand.
 
An investor who attended the presentation, for example, argued that fair value for the deal should be in the high 10% to 11% range, given the default risks associated with the sovereign and the company's aggressive policy of borrowing to pay a dividend to PDVSA.
 
"From whispers in the room, I think this might get done at 10%," he said. "But some of the bargaining power might be in the hands of the investor community."
 
While the company is yet to announce maturity and price talk on the bond portion of the deal, the investor said the yield on offer was expected to be in line with that of the loan.
 
"I imagine (the bond) will have similar terms and similar price talk area. They may try to do a longer deal, but they could do a five-year as well," said the investor, who argued that splitting the financing between a bond issue and a loan would not yield significant savings for the company, but simply allow it to tap a broader pool of investors.
 
Relief Rally
If successful, the deal is expected to provide some support to the short end of Venezuela's and PDVSA's bond curves, easing concerns about this year's maturities.
 
"Although it is less than optimal to use Citgo to carry the debt of PDVSA, this makes us very comfortable that Venezuela will fully meet its debt payments this year," said Daniel Freifeld, founder of Washington-based Callaway Capital Management, which owns both Venezuela and PDVSA bonds.
 
Freifeld argued that as a credit, PDVSA continued to offer a better risk-reward ratio compared with Citgo.
 
"There is lower default risk in Citgo than in PDVSA, but the difference is not enough to justify taking a yield of 10% when PDVSA's October 2015s offer an annualised yield of around 24%," he said.
 
PDVSA's 2015s outperformed other Venezuelan bonds this week over optimism that the Citgo deal will help the company meet most of its US$3.5bn debt maturities, plus interest, due this year.
 
"If you believe there is an interest from the government to maintain PDVSA as a working entity, then this should be particularly beneficial for PDVSA bonds," said Marco Santamaria, a portfolio manager at AllianceBernstein.
 
"But all money is fungible, so you never know if they redirect this money to other purposes."
 
No Sale
Responding to questions from investors, Citgo management confirmed that PDVSA had abandoned earlier plans to sell Citgo, in spite of receiving strong interest from bidders.
 
"PDVSA has confirmed to us that Citgo is not for sale," a company official said. "It was a very robust process. A large number of bidders expressed interest. But PDVSA made a strategic decision not to sell."
 
The US$750m of assets pledged as collateral for the financing package include Citgo's terminals of East Chicago, Linden, Albany, Toledo and Dayton, as well as the company's ownership interest in four pipelines.
 
While only 49% of the operating company could be pledged as collateral without triggering change of control clauses in some of its existing debt, the holding company will be the beneficiary of 100% of future distributions from Citgo Petroleum, including dividends as well as asset or equity sales.
 
The commitment deadline for the loan portion of the deal has been set for February 4, while details of the new bond issue are expected to be announced in the mid-part of next week.
 
Citgo Holding's financing package is expected to be rated Caa1 by Moody's (MCO) and B- by S&P.
 
 
(Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Sudip Roy)

Related News