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Fitch Raises CITGO's IDR to 'BB'; Secured Credit Facility to 'BBB-'.

CHICAGO -- Fitch Ratings has raised the rating of CITGO Petroleum Corp's Issuer Default Rating (IDR) to 'BB' from 'BB-'. Fitch has also raised the ratings on the company's senior secured revolving credit facilities, term loan, and fixed rate Industrial Revenue Bonds (IRBs) from 'BB+' to 'BBB-'. The Rating Outlook is Stable. Fitch rates the debt of CITGO as follows:

--IDR 'BB';

--$1.15 billion senior secured revolving credit facility maturing in 2010 'BBB-';

--$700 million secured term-loan B maturing in 2012 'BBB-';

--Fixed-rate IRBs 'BBB-'.

The main drivers behind the upgrade include: the continued strength of U.S. refining margins, CITGO's competitive position as the owner of three heavy-conversion capacity refineries, and record-high market valuations for refining assets, which enhances CITGO's secured facilities. Fitch's ongoing concerns with CITGO's ratings revolve primarily around the link between CITGO and the Bolivarian Republic of Venezuela (long-term foreign currency rating of 'BB-' by Fitch). CITGO currently sends most of its excess cash to its parent, something which could limit CITGO's financial flexibility during an industry downturn. For the most recent 12 months ending Sept. 30, 2006, CITGO paid $1.94 billion in distributions to its parent. A significant part of this distribution was paid for from the company's recent sale of its 41.25% stake in the CITGO-Lyondell joint-venture refinery in Houston.

CITGO's variable-rate IRBs are supported by letters of credit under the company's current credit facilities and are not rated by Fitch. CITGO's secured facilities are backed by the company's current assets (accounts receivable and inventories) as well as the Lake Charles, Louisiana and Corpus Christi, Texas refineries. Covenants include a maximum debt-to-capitalization of 55% and a minimum EBITDA-to-interest coverage of 3.00 to 1.00. The agreements also contain a carve-out provision to allow for additional debt totaling the greater of $200 million or 10% of CITGO's net worth as well as a $250 million accounts receivable securitization program.

Under existing covenants, Venezuela can upstream net proceeds of up to $3.0 billion from asset sales by CITGO, excluding the Lake Charles and Corpus Christi refineries. While the value of the working capital as well as Lake Charles and Corpus Christi provide significant collateral coverage for the secured lenders, CITGO's ratings are also supported by the company's overall diverse and complex refining base. Given the strategic importance of CITGO's refineries to Venezuela, the continued strong refining margin environment, and limits created by existing covenants, Fitch's current ratings assume that the Lemont refinery will not be sold in the near term.

CITGO's refineries have the capacity to process a high percentage of heavy sour crude, primarily from Venezuela. Heavy crudes typically sell at a 25% to 35% discount to lighter crudes such as the benchmarks West Texas Intermediate (WTI) and Brent. CITGO's discounts, however, are limited somewhat by the crude contracts with Venezuela which account for approximately 50% of CITGO's crude throughput. CITGO remains a critical piece of PDVSA's integrated oil strategy.

In addition to the Venezuelan related concerns, CITGO remains subject to other industry-wide risks. The company is making significant investments to meet ongoing regulations including low sulfur fuels as well as its recent consent decrees to reduce emissions from its refineries. A key risk for CITGO lies in its decision to defer investments needed to meet ultra low sulfur diesel specifications at its Corpus Christi and Lemont refineries until later in the decade. Any unanticipated acceleration of construction costs or schedules could make it difficult for the company to complete its projects on time and under budget. The company also remains subject to both planned and unplanned shutdowns of its refineries, and with two of three refineries located on the Gulf coast, hurricanes are also a concern.

CITGO is one of the largest independent crude oil refiners in the U.S. with three modern, highly complex crude oil refineries and two asphalt refineries. Following the sale of its stake in the CITGO-Lyondell joint-venture refinery in Houston, CITGO now owns 859,000 barrels per day of crude refining capacity. CITGO branded fuels are marketed through more than 11,000 independently owned and operated retail sites. CITGO is owned by PDV America, an indirect, wholly owned subsidiary of Petroleos de Venezuela S.A. (PDVSA), the state-owned oil company of Venezuela. The long-term foreign currency rating of both PDVSA and Venezuela is 'BB-' with a Stable Rating Outlook.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Dec 20, 2006
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