OREANDA-NEWS. Fitch Ratings has affirmed Petroleos de Venezuela, S.A.'s (PDVSA) foreign and local currency Issuer Default Ratings (IDRs) at 'CCC'. Fitch has also affirmed the rating for approximately USD30 billion of senior unsecured debt outstanding at 'CCC/RR4'. Concurrently, Fitch has affirmed PDVSA's national long-term rating at 'AA(ven)'.

KEY RATING DRIVERS

PDVSA's credit quality reflects the company's linkage to the government of Venezuela as a state-owned entity, combined with increased government control over business strategies and internal resources. This underscores the close link between the company's credit profile and that of the sovereign. PDVSA's cash flow generation has historically been significantly affected by the large amount of funds transferred to the central government each year.

LINKAGE TO SOVEREIGN

Petroleos de Venezuela, S.A.'s (PDVSA) credit quality is inextricably linked to the Venezuelan government. Venezuela's ratings (IDR 'CCC') reflect the sovereign's weakened external buffers, high commodity dependence, rising macroeconomic distortions, reduced transparency in official data, and continued policy and political uncertainty. The sovereign's strong repayment record and a relatively low debt amortization profile mitigate imminent risks to debt service. PDVSA is fully owned by the government and its transfers have historically represented around 45% of the government's revenues. It is of strategic importance to the economic and social policies of the country as oil accounts for around 95% of total exports.

LIMITED TRANSPARENCY

The Venezuelan government displays limited transparency in the administration and use of government-managed funds, as well as in fiscal operations, which poses challenges to accurately assessing its fiscal state and the full financial strength of the sovereign. PDVSA also displays similar characteristics, which reinforces the linkage of its ratings to the sovereign.

UNCERTAIN LEVEL OF TRANSFERS TO GOVERNMENT

Although the excess hydrocarbon prices law eliminates transfers to the FONDEN national development fund when oil prices are below USD55/barrel (bbl), the low level of central government reserves will require the government to either reduce social expenditures or disregard the law and maintain historical levels of transfers from PDVSA. Fitch believes these transfers will continue to take place either in form of royalties, social contributions, dividends or investments. The high level of transfers to the central government effectively renders PDVSA's cash flow from operations negative.

FOCUS SHIFTS TO RECOVERY

PDVSA's 'CCC' rating suggests a real possibility of default. If a restructuring occurs, Fitch Ratings anticipates average recovery for PDVSA's bondholders of 31% - 50%, and likely closer to the lower end of the range. While Fitch's recovery analysis yields a high recovery, the willingness of Venezuela's government to extend concessions to investors will likely move actual recovery closer to the lower end of the range. In addition, should oil prices remain depressed, an average recovery may lead to additional future defaults to further reduce obligations and allow for necessary transfers to the government.

KEY ASSUMPTIONS

Linkage to government: PDVSA's ratings assume the implicit support from the government, given the company's strategic importance, would materialize should the company need it.

Slow hydrocarbon price recovery: Fitch assumes West Texas Intermediate crude prices to average approximately USD50 per barrel and to slowly recover to approximately USD70 per bbl in the long-term.

Stable Production: PDVSA's ratings assume the company's production to remain relatively flat over the rating horizon

RATING SENSITIVITIES

Catalysts for a downgrade include a downgrade to Venezuela's ratings, a substantial increase in leverage to finance capital expenditures or government spending and a sharp and extended commodity price downturn. Catalysts for an upgrade include an upgrade to Venezuela's sovereign rating and/or real independence from the government.

LIQUIDITY WILL TIGHTEN IN 2016
As of December 2014, PDVSA reported cash of USD7.9 billion while short-term debt was USD5.8 billion. The company's current liquidity position is more uncertain given that since then the company has paid approximately USD6.0 billion of debt, which might have driven down liquidity and cash flow generation from internal resources for this year would have most likely been compromised by low hydrocarbon prices during the year. Under Fitch`s base case scenario, which assumes USD50/bbl in 2015 and 2016 and investments of USD25 billion annually, PDVSA's liquidity position will continue to deteriorate; 2016 debt amortizations are estimated at approximately USD5.4 billion. Government international reserves, at USD16.1 billion in June 30, 2015, are less than half of those in 2008, when oil prices declined sharply.

FULL LIST OF RATING ACTIONS

Fitch affirms the following

Petroleos de Venezuela, S.A.
--Affirm foreign currency long-term IDR at 'CCC';
--Affirm local currency long-term IDR at 'CCC';
--Affirm National Scale long-term Rating at 'AA(ven)';
--Affirm Sr. unsecured notes at 'CCC/RR4'.