March 28, 2019 / 5:42 PM / 6 months ago

Venezuela-owned Citgo rallies non-banks to raise US$1.2bn in loans

NEW YORK, March 28 (LPC) - Venezuela-owned oil refiner Citgo mandated broker dealer and non-bank lender Jefferies to arrange a US$1.2bn term loan, after its previous traditional bank lenders declined to participate due to regulatory pressure to comply with political restrictions on doing business with its South American parent, sources familiar with the transaction said.

Houston-headquartered Citgo also appointed another non-bank lender, Houlihan Lokey, to coordinate the term loan for the fuel company, which is owned by state-owned Petróleos de Venezuela SA (PDVSA) and currently hamstrung by US-imposed economic sanctions.

A presidential order in November 2018 banned US firms, including US banks, to make any contribution of funds, goods and services to Venezuela and President Nicolás Maduro’s administration. Firms such as Jefferies and Houlihan are not as heavily-regulated as international investment banks, including those that have lent to Citgo in the past, and have more freedom to operate on transactions than banks that are closely scrutinized by overseers including the Federal Reserve.

“Any Fed-regulated entity can’t take the risk of this being viewed as contrary to the US position. They had to find non-regulated entities to perform the transaction,” a senior banker said.

Citgo, which owns three oil refineries and a network of pipelines and gas stations in the US, is one of Venezuela’s most important cash cows. The company is sandwiched in a political tug-of-war that escalated in January after the US-backed head of opposition in Venezuela, Juan Guaidó, contested the re-election of President Maduro.

The US government, taking a harder stance against the Maduro administration, tightened sanctions on PDVSA then, a move that was designed to result in billions of dollars worth of lost export revenue over the next year. Transfers to PDVSA from Citgo have since been placed in a blocked account in the US.

NON-BANKS’ BIG WIN

Jefferies, known for stepping into aggressive deals since leveraged lending guidelines were updated in 2013 and forced its more traditional banking competitors to step back from some riskier transactions, is reprising a similar role in the Citgo loan.

“They’ve been circling the credit for a while,” the first senior banker said. “Jefferies is pretty good in the oil and gas space.”

As administrative agent, Jefferies manages the loan facility on behalf of the lender group. It is responsible for all formal communications between the lenders and the borrower, and the disbursement of the loan.

For Houlihan Lokey, a US independent investment bank known for M&A, restructuring and advisory services, the move to fill the void left by international banks for Citgo comes as the firm works to grow its loan origination business.

“Maybe this ends up being a great opportunity for Houlihan to do the deal and show credentials,” the senior banker said.

A second senior investment banker said the mandate from Citgo was the “first real win” Houlihan has had in the origination business.

Houlihan Lokey declined to comment while Jefferies and Citgo did not immediately respond to requests for comment.

GOOD-BAD CREDIT

Politics aside, market participants view Citgo as a solid standalone credit.

The five-year incremental term loan priced Wednesday at 500bp over Libor with a 1% Libor floor and original issue discount of 99, according to a third source. It is expected to close on Thursday. The loan will mature in March 2024.

Citgo’s most immediate maturity remains the US$900m credit facility the company signed in July 2014 at 275bp over Libor, according to data from LPC, a unit of Refinitiv. In addition, Citgo signed a US$650m term loan in July 2014 that is set to mature in July 2021 and a US$650m bond with a 6.25% coupon due in 2022 that are expected to be partially refinanced by the new loan.

“The (existing) TLB, even with everything that’s been going on, hasn’t traded badly,” the first senior banker said.” People understand that underneath the credit is fine.”

Citgo’s US$650m term loan B, rated B3/B-, has see-sawed in secondary trading since January, dipping to as low as 96.62 earlier this month from 99.38 cents on the dollar in January. The term loan was spotted above 98 cents last week after news of the potential refinancing for Citgo moved the facility closer to par, a trader monitoring the loan said this week.

The company’s US$650m seven-year loan was arranged by Deutsche Bank, ABN Amro, BNP Paribas, Crédit Agricole, Mizuho, Natixis and SMBC in July 2014. The loan priced at 350bp over Libor, LPC reported at the time.

All banks have since distanced themselves from the credit, the two senior bankers said.

“Investors are in a very different position (than banks),” the second senior banker said. “If returns make sense for the risk, (investors) would do it, but it’s a very different question whether banks can do a deal due to regulatory reasons.”

RISK VS. REWARD

Investors considering the transaction were torn between a generous spread on offer for the Citgo loan versus the risk that comes with betting on a company linked to a heavily-scrutinized political regime.

“A lot of people seem to think Venezuela is on the verge of political change,” said Raul Gallegos, an associate director with Control Risks’ global risk analysis business. “This is not just a normal refinancing operation (being done) under the guise of a business being run as a ‘going concern.’”

At 500bp over Libor, investors still come out well on top when compared to other B-rated borrowers. The average spread on a drawn term loan B for a B-rated issuer was 420bp over Libor as of March 20, according to LPC.

The risk, however, is too much to bear for some on the buyside when compared to the juicy spread on offer, an investor familiar with the transaction said. Citgo’s links to Maduro’s government and PDVSA has potential to cause reputational risk, he said.

“It is tough to give that up,” the investor said of the price on offer for Citgo’s term loan. “But I could not agree to the deal.”

Furthermore, parties exposed to Citgo need to consider the company’s exposure to stakeholders outside of Venezuela and its oil company.

PDVSA’s US$3.4bn bond due in 2020, the only paper that Venezuela has not yet defaulted on, has 51% of Citgo equity pledged as collateral to holders of the PDVSA 2020 security. The other 49% of Citgo’s parent is pledged to Russian oil company Rosneft, which has provided bilateral loans to Venezuela in the past.

Either pledge could be called upon if PDVSA defaults on this bond, leaving Citgo’s term loan holders at the mercy of a complex debt restructuring. (Additional reporting by Kristen Haunss.) (Reporting by Aaron Weinman, Michelle Sierra and Jonathan Schwarzberg; Editing by Lynn Adler and Jon Methven)

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