CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B/RR4' Long-Term Rating to YPF S.A.'s (YPF) up to USD325 million reopening of its Class XXVII bond due 2024. The notes are USD denominated and carry a fixed rate of 8.75%. YPF expects to issue the notes under a voluntary exchange for two existing bonds: Class X notes due 2016 and Class XI notes due 2017. The proposed bond will amortize in three installments: 30% in 2022, 30% in 2023 and the remaining in 2024.
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 Long-Term Foreign and Local Currency Issuer Default Rating (IDR) of 'B'.
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 on private sector corporates, which may prevent them from converting local currency to any foreign currency (FC) 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 to 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). Capex investments for the second quarter of 2016 (2Q16) were approximately 38% lower in dollar terms compared with the same period of 2015. 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 2Q16 averaged 582,300 boe per day, which was similar to 1Q15 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 56% market share of domestic gasoline and 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 June 2016, net leverage, as measured by net debt-to-EBITDA, reached 2.1x (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 8.37 per boe including the USD750 million and the CHF300 million issued during 3Q16).
As of June 30, 2016, YPF's total debt was approximately USD9.2 billion, and the company reported EBITDA for the LTM of USD4.67 billion. Fitch's calculated equivalent EBITDA in USD for the LTM ended June 30, 2016 was approximately USD4.2 billion. Fitch uses a weighted quarterly average USD/Peso exchange rate to convert YPF's financial results into U.S. 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 six months and the timing of sales and costs recognition.
Reported EBITDA for the 2Q16 was down 13% compared with 2Q15 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 CHF300 million and the USD750 million bonds issued during 3Q16, the company's total debt-to-EBITDA ratio for the past 12 months would rise to 2.5x on a pro forma basis. The proposed issuance will be used to repay existing debt and will not result in an additional increase in gross leverage.
KEY ASSUMPTIONS
--Mid-single-digit production growth annually;
--Realized oil prices of USD61/bbl, which could marginally decline to mid-USD50/bbl range in the short- to medium-term;
--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 approximately USD4.7 billion for 2016. Fitch conservatively assumes capex of USD4.5 billion per year during 2017 - 2019;
RATING SENSITIVITIES
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;
--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 occur as the result of an upgrade of the sovereign rating.
LIQUIDITY
Total cash and equivalents amounted to approximately USD1 billion as of June 30, 2016. The company's liquidity position is further strengthened by the USD750 million proceeds received from the bonds issued on July 7, 2016 and the government bonds (BONAR 2020) related to the 2015 Plan Gas receivables. The company's liquidity position is considered adequate to cover its 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:
--Long-Term Foreign Currency IDR 'B'; Outlook Stable;
--Long-Term Local Currency IDR 'B'; Outlook Stable;
--Notes due 2018, 2020, 2021, 2024, 2025, 2028 'B'/'RR4'.
Date of Relevant Rating Committee: March 23, 2016
Additional information is available on www.fitchratings.com.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.