Given the BP oil spill disaster, it isn’t a surprise that oil-refining company Citgo is having problems getting financing. The company wanted to raise $ 1.5 billion by selling bonds. However, the business that they are in and the fact the company is “exposed” to Venezuela made this sale a flop. Now, the company is turning to $ 2 billion in bank loans combined with just $ 300 million in bonds.
The bond sale ends up failing
Citgo, which is the child company of Venezuelan PDVSA, has been running at a net operating loss for the first quarter of the year. In order to raise quick cash to run their new company with, the company tried to sell $ 1.5 billion in bonds. Bonds are a group of individual little loans, where the company has to repay the bond plus interest to investors. Citgo bonds were slated for 2017, meaning any investor who bought them would have to wait seven years to get paid back. Investors didn’t seem interested.
Bank loans to the rescue
Because the pay day of bonds didn’t pan out, Citgo was forced to find other options for money loans. The company turned to private money lenders, and it was able to raise $ 2 billion. That money is from new credit extended to the company, and partially from “extension of existing credit lines.” In other words, these lenders were willing to take on the risk of extending credit to Citgo. These lenders have said that they are planning on turning these loans into bonds — in other words, spreading the risk out among many, many more investors.
Operating loss from Citgo
Citgo lost money last quarter for many reasons. There is political instability in Venezuela, which is where Citgo’s parent company lives. Though Venezuela’s oil company does not do much offshore drilling, the BP oil spill is generally affecting the oil and fuel market. This instability within the market is contributing to all of the companies like Citgo being unable to get financing to continue operations.
