Oliver L Campbell // CITGO PR blunder ... pulling the wool over our eyes?

Former Petroleos de Venezuela (PDVSA) Finance Coordinator Oliver L Campbell writes: When I read that "CITGO Petroleum Corporation announced the successful completion of the refinancing of its $2.1 billion indebtedness which strengthens the financial condition of the company by extending the maturity of its indebtedness and securing liquidity for its operations" I could not help thinking about the role of PR (Public Relations) in a large company ... is it to present the company in the best light possible by massaging the facts, or to be honest with the public while still trying to limit any detrimental impression?

Last month CITGO announced it proposed making a $1.5 billion bond issue. This was to be in the form of Senior Secured Notes due 2017 and 2010, and the funds would be used for refinancing present obligations. The company has just announced it will refinance $2.1 billion with a three year revolving credit facility of $750 million, a five year loan of $350 million, a seven year loan of $700 million ... and a seven year note issue of $300 million paying interest of 11.5%.

It is not surprising the notes have been reduced from $1.5 billion to only $300 million since an interest rate of 11.5%, under current conditions, can only be seen as penal -- interest rates are at the lowest they have been for very many years.

Treasury notes today yield 2. 57% for seven years (3.12% for ten years) and the spread of nearly nine percentage points tells a sorry story -- it can only be due to the perceived risk.

Reuters says there was insufficient demand due to "investor concerns about the issuer's exposure to Venezuela, as well as market volatility."

I rather think it was because CITGO made a net loss of $201 million in 2009 and a proportionately higher loss of $127.7 million in the 1st Quarter of 2010. We are not told what the interest rates on the loans are ... whether they are fixed or vary with LIBOR. However, though they will be lower than 11.5%, they also will reflect the same perceived risk.

The statement made by CITGO'S president, Alejandro Granado, that "This achievement clearly underscores CITGO's strength and the confidence of the international financial markets in the managerial and operational capacity of our company, which is particularly significant in the context of the current global economic instability that has impacted all productive sectors, including the refining industry" is what I consider a PR blunder.

It is clear to all and sundry that to refinance at rates up to 11.5%, when interest rates are a historical low, is hardly a mark of "strength and confidence."

I come back to my original point ... should not the PR policy have been one of more frankness with which we could sympathize, or even commiserate, rather than one which tried to pull the wool over our eyes?

There has indeed been a "successful completion of the refinancing" but at a considerable cost. This could have been explained by stressing in the press release that CITGO is temporarily in a loss-making situation which has meant paying higher interest rates than would otherwise have been the case.

I have been ... and still am ... a great defender of the investment in CITGO as one that was made, not to make a lot of money downstream, but to protect a lot of money upstream by providing an outlet for PDVSA's heavy and problematical heavy crudes.

Even though CITGO is temporarily making losses, I am certain the integrated operation with PDVSA is still making a substantial profit.