Fitch: CITGO Sale Precipitates PDVSA CDS Curve Inversion

Five-year credit default swaps on Petroleos de Venezuela S.A. (PDVSA) widened 16% over the past week, according to Fitch Solutions. PDVSA CDSs widened 31% during the past month, significantly underperforming Fitch Ratings' Global Oil & Gas CDS Index, which had firmed 5% during the same period. The one- and five-year CDSs referencing PDVSA have inverted, indicating that the market is pricing in higher credit risk at the shorter end of the curve.

Mounting market concern over PDVSA's credit prospects reflected in the CDS change can likely be attributed in part to the company's decision to sell its American CITGO unit, which could indicate the company's immediate need for cash flow.

Yield volatility for PDVSA and the Venezuelan government bonds (PDVSA bonds are linked to the sovereign) can be attributed to the CITGO sales story, as well as other factors. Among them were comments from former Venezuelan planning minister Ricardo Hausmann that the government should default on its obligations due to the country's dire financial position. PDVSA has USD3 billion in maturities due October 2013.

CDS liquidity for PDVSA has increased to trade in the 16th regional percentile, up 10 rankings compared to one month ago. Increasing CDS liquidity often signals growing market uncertainty over the future direction of spreads for an issuer.

Earlier this month, President Nicolas Maduro removed the government's primary economic policy maker, Rafael Ramirez, from office, which increased macroeconomic uncertainty.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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