Business Services Industry

S&P Places Notes of PDVSA Finance on WatchNeg

Business Wire, April 10, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

April 10, 2002-- Standard & Poor's today placed its triple-'B'-minus ratings on the senior unsecured notes issued by PDVSA Finance Ltd., a wholly owned subsidiary of Petroleos de Venezuela S.A. (PDVSA), on CreditWatch with negative implications.

The CreditWatch placement affects $3.6 billion of U.S. dollar-denominated notes and 200 million in euro-denominated notes (see list).

The CreditWatch placement indicates the increased probability of a downgrade if the current dispute between workers at PDVSA and the Venezuelan government leads to a substantial decline in output. A downgrade of the notes will depend on Standard & Poor's assessment of any impairment of the short- and long-term production capacity of PDVSA, which is threatened by the unexpectedly severe reaction of PDVSA management to the government's politically motivated changes in senior management and the board of directors.

According to PDVSA, current work stoppages have not affected crude oil export volumes to designated customers, although independent reports indicate otherwise. According to Standard & Poor's analysis, exports would have to be halted for almost two months to trigger a covenant violation or more than six months to trigger a payment default, which is unlikely given the strong economic incentives for the government of Venezuela to ensure an orderly continuation of oil exports. While government and/or military action could restore export flows in the short term, Standard & Poor's is concerned that the recent dispute-if not resolved amicably-still could translate into a reduction in the company's long-term production capacity through many mechanisms, including (but not limited to) ongoing acrimonious relations between the government and PDVSA's workers, the draining of PDVSA's managerial and intellectual talent, and constrained access to capital. The ability of PDVSA to consistently export is critical to the transaction's investment-grade ratings as it underpins its strong financial parameters. PDVSA's export capacity and the transaction's strong financial parameters are still well above PDVSA and the Bolivarian Republic of Venezuela's single-'B' long- and short-term foreign currency ratings. The outlook on PDVSA and the government's foreign currency ratings is negative.

Standard & Poor's requirements for investment-grade future flow transactions to maintain liquidity reserves equal to at least three month's debt service and to have strong cash flow coverage of debt service help to reduce the risk of either payment default or covenant breaches that could result from events such as a prolonged strike by PDVSA workers. The liquidity account is currently fully funded and available to cover the next debt service payment in May, if necessary. While the coverage levels have dropped to 11 times (x) from 19x in December, the drop is more a result of an increase in principal amortization beginning in May than a result of a reduction in receivables generation. According to PDVSA, while OPEC cuts have reduced the level of receivables flowing through the transaction, the company has added designated customers to the program in order to maintain a ratio of collections over debt service greater than 10x.

A copy of Standard & Poor's complete rating analysis on PDVSA Finance Ltd. is available on RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. To speak with an analyst directly regarding PDVSA Finance, contact Nancy Gigante Chu, Structured Finance Latin America, New York (1) 212-438-2429; regarding PDVSA, contact Bruce Schwartz, Corporate Ratings, New York, (1) 212-438-7809, or Jose Coballasi, Corporate Ratings, Mexico City (52) 55-5279-2014.


RATINGS PLACED ON CREDITWATCH WITH NEGATIVE IMPLICATIONS
PDVSA Finance Ltd.

Issue                                 Rating
Class A 6.45% notes due 2004          BBB-
Class B 6.65% notes due 2006          BBB-
Class C 6.80% notes due 2008          BBB-
Class D 7.40% notes due 2016          BBB-
Class E 7.50% notes due 2028          BBB-
Class F 8.75% notes due 2004          BBB-
Class G 6.25% notes due 2006          BBB-
Class H 9.40% notes due 2007          BBB-
Class I 9.75% notes due 2010          BBB-
Class J 9.95% notes due 2020          BBB-
Class K 8.50% notes due 2012          BBB-