Moody's Downgrades Venezuela Orinoco Heavy Oil Projects

Moody's Investors Service has downgraded ratings on debt issued by three Venezuelan heavy oil projects in which the government has taken majority stakes, pushing the ratings further into speculative-grade territory.

Moody's decision came out late Wednesday and affects $2.5 billion in debt issued by Hamaca, Petrozuata and Sincor. These ratings were cut to B2 from B1 and are also on review for further downgrade.

Moody's already downgraded the fourth oil project, Cerro Negro, to B3 from B1 in mid-May after bondholders initiated "prospective default" proceedings in response to the assumption of operational control by state-owned oil company Petroleos de Venezuela, or PdVSA.

On Tuesday, ConocoPhillips and Exxon Mobil Corp. said they were withdrawing from their investments in the Orinoco projects.

Moody's said it remains "concerned about scenarios that could evolve in the future as the projects operate under majority PdVSA control, including circumvention of debt terms and structural protections."

The transfer in ownership may trigger a technical default on the project bonds, Moody's said, because shares of the foreign oil majors -- but not of PdVSA -- are pledged as collateral for the debt. With the foreign companies now holding reduced stakes in the projects or no participation at all, "lenders will effectively be dispossessed of a significant portion of their security" and this could constitute a breach of provisions in the bond contracts.

In a note sent to clients Thursday, HSBC highlighted concerns that PdVSA's compensation to the foreign oil companies could fall notably short of market value.

In addition, "it remains unclear whether PdVSA will assume debt issued by the four major projects in the Orinoco, and if it does so, whether default articles on this debt will be triggered," HSBC said. "Given the negative prospects we expect further downgrades on this debt pressuring the overall sovereign credit."

Venezuelan sovereign external bonds have been under heavy pressure this week. In midday trade, the country's risk premium on JPMorgan's Emerging Markets Bond Index Global Diversified was one basis point tighter at 320 basis points over Treasurys, but returns were a negative 0.2 percent.

Barclays Capital said in a Thursday note that "at current levels...Venezuela and PdVSA (bond) spreads appear to be overstating the risks, in our view."