CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign a rating of 'B/RR4' to YPF S.A.'s (YPF) proposed senior unsecured bond issuance of up to USD750 million Argentine peso-linked variable rate notes due 2020. The proceeds will be used to fund fixed asset investments in Argentina and working capital requirements. The notes will rank at least pari passu in priority of payment with all other YPF senior unsecured debt. The notes would be rated the same as all of YPF's senior unsecured obligations.
KEY RATING DRIVERS
YPF's ratings reflect its strong linkage with the credit quality of the Republic of Argentina and the company's relatively low reserve life. YPF's 'B' ratings are linked to the sovereign rating of Argentina, which has a 'B' foreign and local currency Issuer Default Rating (IDR).
Fitch has assigned a country ceiling of 'B' to the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates. Country Ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates, which may prevent them from converting local currency to any foreign currency under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Since taking power in December 2015, the Mauricio Macri administration removed FX controls introduced in 2011 and increased the flexibility of the Argentine peso, which should contribute towards improving the capacity of the economy to absorb external shocks and relieve pressure on international reserves.
LINKAGE TO SOVEREIGN: YPF's ratings reflect the close linkage with the Republic of Argentina resulting from the company's ownership structure as well as recent government interventions. The Republic of Argentina controls the company through its 51% participation after it nationalized the company in April 2012. Since this action, the company's strategy and business decisions are governed by the Republic.
LOW HYDROCARBON RESERVE LIFE: The ratings consider the company's relatively weak, though improving, operating metrics characterized by a low reserve life. As of year-end 2015, YPF reported proved reserves of 1,226 million barrels of oil equivalent (boe) and average production of 577,000 boe per day (52% crude oil). Based on production trends, the company's reserve life is below-optimal at approximately six years. This could create significant operational challenges in the medium- to long-term, and gives the company limited flexibility to reduce capex investments in order to increase upstream reserves/production.
STABLE PRODUCTION: As expected by Fitch, the company's production remained stable with an average production of 577,000 boe in 2015 (up 3% year-over-year). During 2016, the company reduced its capex investments by 25% in dollar terms. Despite the significant reduction in the company's capital expenditure program during 2016, Fitch expects the company to continue with its initial ambitious capex program to maintain stable production in 2016 and increase production in the following years. Production in the first quarter of 2016 (1Q16) averaged 582,300 boe per day, which was similar to 1Q'15 production levels and in line with our assumptions.
STRONG BUSINESS POSITION: Fitch expects the company to continue to solidify its market leadership in Argentina. YPF benefits from a strong business position supported by its vertically integrated operations and dominant market presence in the Argentine hydrocarbons' market. Fitch anticipates that YPF will continue to exercise an active role in domestic fuel and gas supply. In the downstream segment, where YPF enjoys a 57% market share of domestic gasoline sales and approximately 57% of diesel sales, the company benefits from relatively high prices for refined products in Argentina.
ADEQUATE CREDIT PROTECTION METRICS: YPF has relatively solid credit protection metrics, characterized by moderate leverage and a manageable debt amortization schedule. For the LTM ended March 2016, net leverage, as measured by net debt-to-EBITDA, reached 1.66x (considering Fitch's calculated EBITDA for YPF in USD), which is still considered moderate for the assigned rating. YPF's total debt-to-total proved reserves ratio was USD7.5 per boe (USD 8.1 per boe pro forma after bond issuance).
As of March 31, 2016, YPF's total debt was approximately USD9.2 billion, and the company reported EBITDA for the last 12 months (LTM) of USD4.85 billion. Fitch's calculated equivalent EBITDA in USD for the LTM ended March 31, 2016 was approximately USD4.4 billion. Fitch uses a weighted quarterly average USD/Peso exchange rate to convert YPF's financial results into US dollar equivalent figures. Differences between the company's reported numbers and Fitch's figures arise given the high currency volatility experienced in Argentina over the past three to six months and the timing of sales and costs recognition.
EBITDA for the 1Q'16 was down 27% compared with 1Q'5 as a result of lower domestic oil prices (10% lower) and significant currency devaluation. While the upstream segment benefitted from the devaluation, the downstream business was severely affected by the devaluation of the Argentine peso.
Fitch assumes production will remain stable during 2016 assuming flat EBITDA trends in 2016. During recent years, the company's leverage has been moderately increasing, mostly as a result of increases in debt to fund the company's ramped-up capital expenditure program. Fitch believes net leverage will remain close to 2.0x during 2016-2017 as a result of lower domestic prices, significant capex needs and pressure from local currency devaluation. These leverage levels are still considered moderate for the rating category. Incorporating the proposed bond issuance of up to USD750 million, the company's total debt-to-EBITDA ratio for the past 12 months would rise to 2.3x on a pro forma basis.
--Mid-single-digit production growth annually;
--Realized oil prices of USD61/bbl, with increased realized natural gas prices increasing to the USD4.5/MMcf level over the next five years;
--Low-single-digit revenue growth in dollar terms over the next five years;
--Capex of USD4.7 billion for 2016. Fitch conservatively assumes capex of USD4.5 billion per year during 2017-2019;
Future developments that could, individually or collectively, lead to negative rating actions in the short term:
--Argentina's economic deterioration and the company's inability to maintain an adequate liquidity position or access to foreign currency;
--Any further weakening of Argentina's fiscal accounts could have a negative impact on the companies' collections/cash flow;
--A significant deterioration of credit metrics, and/or;
--The adoption of adverse public policies that can affect the company's business performance in any of its business segments.
A positive rating action could be the result of an upgrade of the sovereign rating.
Total cash and equivalents amounted to approximately USD1.9 billion as of March. 31, 2016, this covers the short-term debt due during 2016. The company has been successful accessing the local and international markets, and given that the company is controlled by the Argentine government, Fitch does not anticipate any difficulties in accessing the debt markets to refinance short-term debt.
FULL LIST OF RATING ACTIONS
Fitch currently rates YPF S.A. as follows:
--Foreign currency long-term IDR 'B'; Outlook Stable;
--Local currency long-term IDR 'B'; Outlook Stable;
--Notes due 2018, 2021, 2024, 2025, 2028 'B'/'RR4'.
Date of Relevant Rating Committee: March 23, 2016
Additional information is available at www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)