(Moody’s, 29.Jan.2021) — Moody’s Investors Service assigned a Caa3 rating to YPF Sociedad Anónima’s (YPF) proposed senior secured notes due 2026 and senior unsecured notes due 2029 and 2033. The outlook is stable.
Net proceeds from the proposed issuance will be used for a tender offer to exchange a combined principal of $6.2bn corresponding to seven international senior unsecured notes maturing in 2021, 2024, 2025 (both notes maturing in March and July), 2027, 2029 and 2047. YPF’s proposed debt exchange offer, which reflects requirements from the Argentine central bank (BCRA) to refinance the 2021 notes, also aims to extend the maturity of its outstanding financial debt and find financial relief for the company in 2021 and 2022, and will not receive any cash proceeds from the issuance of the proposed notes.
The rating of the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody’s to date and assume that these agreements are legally valid, binding and enforceable.
Ratings assigned:YPF Sociedad Anonima- 4.0%/9.0% step up senior secured notes due 2026, assigned Caa3- 2.5%/9.0% step up senior unsecured notes due 2029, assigned Caa3- 1.5%/7.0% step up senior unsecured notes due 2033, assigned Caa3
YPF’s Caa3 ratings reflect the company’s position as the largest integrated oil and gas company in Argentina, with an extensive portfolio of assets in the country including, among others, a large portfolio of oil and gas concessions and reserves; refining assets that account for over half Argentina’s refining nameplate capacity; a broad network of service stations and logistics assets; a petrochemical business through Profertil S.A. (50% stake), fully integrated with its refining and natural gas businesses; a separation and fractioning of NGL business through Compañía Mega S.A. (38% stake); and a power generation business through YPF Energía Electrica S.A. (“YPF Luz”, Caa3 negative), a company jointly controlled with GE EFS Power Investments B.V. Also incorporated in the rating are YPF’s good credit metrics for its rating category.
YPF Caa3 ratings also incorporate its links with the Government of Argentina (Ca stable), its controlling shareholder, which combine YPF’s underlying caa3 baseline credit assessment (BCA), which expresses a company’s intrinsic credit risk, and our view of moderate support from and high dependence on the Argentine government.
Key rating challenges for YPF’s ratings are its concentration of operations in Argentina, a moderate-to-high foreign-currency risk given that most of the company’s debt is denominated in foreign currency, coupled with heightened refinancing risk as a result of more restrictive capital controls imposed by the Argentina’s Central Bank (BCRA) in September 2020; and its portfolio of majority mature producing fields and rigid labor cost structure.
The company faces tight financial conditions in Argentina, where the BCRA imposed new and more restrictive capital control requirements on corporates to have access to the official foreign-exchange market (Mercado Único y Libre de Cambios or MULC) on 16 September 2020. According to the new regulation, companies that face financial capital payments exceeding $1 million between 15 October 2020 and 31 March 2021 will only have access to the MULC to obtain foreign currency for up to 40% of the face value, with an additional condition of postponing the remaining 60% for at least an average life of two years. The resolution does not restrict interest payments of any kind and includes several exceptions, including trade finance, multilateral loans and Export Credit Agencies (ECA).
YPF’s exchange offer reflects the requirements from the BCRA to refinance the 2021 notes´ maturity in March 2021, but it also aims to extend the debt maturity profile and to relieve the oil company’s liquidity, freeing up funds for use toward its investment plan for 2021.We consider the offer a distressed exchange because it may results in economic losses for bondholders –depending on the exit yields used by investors to value the proposed exchange offer– and it allows the company to avoid a potential default. But its losses would be consistent with those of an oil and gas company with a Caa3 rating, which considers an expected recovery rate of 65%-80%. In addition to the exchange offer, YPF has released a consent solicitation memorandum, which is subject to acceptance of more than 50% of bondholders of the existing notes, to strip certain covenants from the existing notes, such as the definition of events of default, to make the exchange offer more appealing. The offer closes on 5 February.YPF’s exchange offer will allow holders of senior unsecured notes maturing in 2021, 2024, 2025 (both notes maturing in March and July), 2027, 2029 and 2047 with a combined principal of $6.2 billion to exchange their existing notes for a combination of three new proposed notes maturing in 2026, 2029 and 2033 (plus a cash consideration for holders of 2021 notes).
The proposed notes maturing in 2029 and 2033 will be senior unsecured. The 2029 notes will accrue an interest coupon of 2.5% through and including December 2022, and a 9.0% interest thereafter; principal will be repaid in seven semiannual installments starting on June 30, 2026. The 2033 notes will accrue an interest coupon of 1.5% through and including December 2022, and a 7.0% interest thereafter; principal will be repaid in four annual installments starting on September 30, 2030.The proposed notes maturing in 2026 will be senior and secured, backed by (1) the company’s export revenue; and (2) will include a pledge to YPF´s shares in YPF Luz. The company will keep net cash proceeds from exports in an “Export Collection Account” held with the offshore collateral agent (Citibank, N.A.) in New York, United States, in an amount that represents the lesser of (i) 120% of the sum of principal and interest payments of the new 2026 senior secured notes due within the next 12 months, and (ii) the aggregate net proceeds from exports during the 12-month period prior. Citibank, N.A. will transfer to a “Reserve and Payment Account” amounts deposited into the Export Collection Account, to the extent available, in line with the minimum coverage ratio of 125% of principal and interest due over the next six months. Also, for so long as at least 50% of the original principal amount of the new senior secured 2026 notes is outstanding, the shares of YPF Luz, representing approximately 50% of the outstanding capital stock and voting rights of YPF Luz. The proposed 2026 notes will accrue an interest coupon of 4.0% through and including December 2022, and a 9.0% interest thereafter; principal will be repaid in 13 quarterly installments starting on February 12, 2026.The proposed notes will also include a net leverage incurrence ratio covenant that decreases to 3x in 2024 from 4x in 2021, which will be in place up until the maturity of the proposed 2026 notes.
YPF has a tight liquidity profile. During 2020 YPF’s sales and liquidity deteriorated with lower local fuel demand and prices in dollar terms amid the coronavirus related lockdown and economic turmoil and volatility in Argentina. The company’s liquidity also tightened with Argentina’s restrictions on corporate access to the international bond markets, which stemmed from the government’s debt crisis and tighter capital controls. As of September 2020, YPF’s Moody’s adjusted total debt –which includes lease liabilities– amounted to ARS692 billion ($9bn), of which of ARS171bn ($2.2bn) matured in the short-term. At the same time, YPF held around ARS76,406bn ($1bn) in cash and marketable securities, which represents 45% of short-term liabilities. Also, as of September 2020, 93% of YPF’s reported financial indebtedness was denominated in foreign currency, mainly in US dollars.
One of the objectives of the exchange offer is to relieve the company’s tight liquidity, freeing up funds that the company intends to use for its $2.7bn investment plan for 2021, higher than the $1.6bn of capital investment in 2020, but well below the $3.5bn in 2019. YPF intends to ramp-up capital spending in its upstream segment in particular (78% of 2021´s budget) in order to gradually increase production of oil and gas through its conventional and unconventional resources (30% and 48% of 2021´s budget, respectively). In particular, YPF was recently awarded a four-year contract to deliver 20.9 million cubic meters per day of natural gas in the framework of Plan Gas 4, the new government-sponsored gas development program.
YPF’s stable outlook reflects our view that YPF’s main shareholder, the Argentine state (51% stake), will exert no influence over the company to spend in capital expenditures or dividends beyond its operating cash flow generation capacity and has incentives to maintain prices of crude and oil products at a level that makes it economically attractive for oil companies to invest to increase production and reduce the country’s dependence on imports of oil products and natural gas. YPF´s creditworthiness cannot be completely de-linked from the credit quality of the Argentine government, and thus its ratings also incorporate the risks that it shares with the sovereign. Also, the stable outlook reflects our view that possible losses for senior unsecured creditors will not be greater than those associated with a Caa3 rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
YPF’s ratings could be upgraded (1) if there is an upgrade of the government of Argentina’s Ca rating and YPF maintains good credit metrics for its rating category; (2) if the company manages to grow total production while maintaining good margins and relatively low leverage; (3) if there is a more clear view of the government’s energy policies for the next several years and how they could affect YPF.The ratings could be downgraded if (1) we believe possible losses for senior unsecured creditors would be greater than those associated with a Caa3 rating; (2) if the company loses access to credit markets or lacks access to foreign currency to meet its debt service obligations; (3) if the government of Argentina’s Ca rating is downgraded. A significant deterioration in the company’s liquidity profile can also lead to a rating downgrade.
YPF is an Argentina-based integrated energy company, with operations concentrated in the exploration, development and production of crude oil, natural gas and liquefied petroleum gas, as well as downstream operations engaged in the refining, chemical production, retail marketing, transportation and distribution of oil and petroleum products. Additionally, through YPF Energía Eléctrica S.A. (Caa3 negative), a company that YPF jointly controls with GE EFS Power Investments B.V. (“GE”), the company is also present in the power generation sector. YPF is controlled by the Argentine state, which holds 51% of the company’s shares.
As of September 2020, YPF accounted for 42% of the country’s oil production and 34% of natural gas, with a 55% market share for gasoline and diesel. The company had proved oil and gas reserves of 1,046 million barrels of oil equivalent (boe, 6,000 cubic feet = 1 boe) as of year-end 2019, with net oil and gas production averaging 500,000 boe/day in 2019 and 479,000 boe/day as of the 12 months through September 2020. Its reserve life (proved reserves) increased slightly, to 5.7 years in 2019 from 5.6 years in 2018.