Fitch Comments on PDVSA Offer to Buy Cerro Negro Bonds
Fitch Ratings said Wednesday that Petroleos de Venezuela, S.A. (PDVSA) has made an offer to purchase the Cerro Negro Finance bonds. PDVSA has the approval of bondholders representing approximately 79% of aggregate principal amounts of the Cerro Negro Bonds. The remaining bond holders could be left with little or no security.
PDVSA (IDR 'BB-', Negative Outlook) expects to use approximately $500 million to purchase all of the outstanding bonds and provide a 33% redemption premium associated with the Cerro Negro project. The purchase price is equal to the outstanding principal amount as of the payment date, plus any accrued and unpaid interest up to, but not including, the payment date. The agreement provides for PDVSA (or an affiliate) to consummate the tender offer by midnight New York City time, on Dec. 27, 2007.
The outstanding amounts, as of today, are: --US$70 million for $200 million 7.33% bonds due 2009 (the 2009 bonds); --US$350 million for $350 million 7.90% bonds due 2020 (the 2020 bonds); --US$50 million for $50 million 8.03% bonds due 2028 (the 2028 bonds).
In order to tender the bonds, bondholders are required to approve certain proposed amendments to the indenture, the common security agreement (CSA) and the other financing documents. These amendments require the approval of bondholders of more than 75% of aggregate principal amounts of the bonds.
If the PDVSA tender offer is consummated, bondholders who elected not to tender their bonds will not be entitled to the benefit of most of the restrictive covenants, events of default and other related provisions presently contained in the indenture, the CSA and the other financing documents which will be eliminated by the proposed amendments. In addition, all of the collateral will be released, and the bonds will become unsecured obligations of the issuer and the borrowers. As a consequence, cash currently on deposit in the Cerro Negro project accounts, including accumulated cash in the debt service and debt reserve accounts allocated for payments on the bonds, will be released and the project accounts closed. Additionally, the use and distribution of Cerro Negro project revenues will no longer be restricted. According to the latest financial data available to Fitch, as of March 31, 2007 Cerro Negro held a cash balance of approximately $341 million in the project accounts.
In the event that the tender offer is not consummated, all rights and remedies of the parties with respect to the CSA, the project accounts, and the flow of funds shall remain unaffected.
Thus far, PDVSA and Mobil have not reached an agreement, and Mobil has filed for arbitration for its share of equity. The new equity structure comprises Corporacion Venezolana del Petroleo, S.A. (CVP), a wholly owned subsidiary of PDVSA, with an 83.33% share and Veba Oil, a subsidiary of BP Plc, with a 16.66% share. Fitch will continue to monitor these events.
On Feb. 26, 2007 decree 5.200 was signed by the President of Venezuela. This decree acts to authorize the operational transfer of the four extra heavy crude oil strategic associations in the Orinoco Basin to 'Empresas Mixtas' or mixed enterprises, wherein PDVSA or a wholly owned subsidiary of PDVSA holds at least 60% of the equity share. PDVSA is now operating the four heavy oil projects (Cerro Negro, Hamaca, Sincor, Petrozuata). Fitch remains concerned about PDVSA's ability to extract and process heavy oil due to the lack of experienced technical and managerial expertise and available resources for ongoing capital expenditures, which are necessary to maintain production capacity.
All of the outstanding senior debt of the Hamaca heavy oil project (rated 'B-') was prepaid in full on Dec. 14, 2007. Fitch will withdraw the rating upon receipt of the Trustee Certificate. Prepayments were made out of project-level funds. The senior debt consisted of a syndicated bank credit facility and a bank credit facility guaranteed by the Export-Import Bank of the United States. The new ownership structure is CVP with a 70% share and Texaco Orinoco Resources Company, a wholly-owned subsidiary of Chevron Corporation, with a 30% share. ConocoPhillips is no longer a participant in the project. As with Mobil in the Cerro Negro project, ConocoPhillips did not accept the terms of the purchase offer made by PDVSA and is in the process of arbitration.
Fitch believes that PDVSA is in the process of restructuring the Sincor Finance (Sincor) bank loan. Although the new structure is unclear, Fitch was informed that the new debt would be in the range of $1.3 - $1.5 billion. The new ownership structure consists of CVP with a 60% share, TOTAL with a 30.32% share, and Statoil with a 9.68% share.
PDVSA has indicated that the bonds issued by Petrozuata Finance Inc., 100% owned by CVP, would also likely be restructured. ConocoPhillips, which had a 50.1% equity stake in the project, is no longer a participant and is in the process of arbitration with PDVSA.
Fitch rates the bonds of Cerro Negro and Petrozuata at 'CCC' and Sincor at 'B-'. The projects' ratings are currently on Rating Watch Negative. Prior to the prepayment, Fitch rated Hamaca's bonds at 'B-' on Rating Watch Negative. Cerro Negro, Hamaca, Sincor and Petrozuata are all domiciled in Venezuela and are key to the development of the Orinoco Basin's extra heavy crude oil reserves. Bondholders rely solely on the ability of each project to generate sufficient cash flow from operations to meet scheduled debt service. Revenues are largely derived from the sale of syncrude exports.
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