MOODY’S CHANGES REPSOL YPF’s OUTLOOK FROM NEGATIVE TO STABLE
Moody's Investors Service today amended the outlook on Repsol YPF’s Baa2 long-term debt rating from negative to stable. Moody’s said that the change reflects the steps which Repsol YPF has taken to improve its financial position in recognition that the economic situation in Argentina will continue to be volatile.
Moody’s outlook change for Repsol YPF reflects the active approach the company is taking to controlling its vulnerability to future country risk exposure. Operationally, Repsol YPF is seeking to diversify the geographical spread of its activities to reduce its risk concentration in Argentina. To achieve a significantly more balanced business mix will take a number of years but Repsol YPF is changing the focus of its investments to other parts of Latin America and beyond. Moody’s notes that around one-third of Repsol YPF’s operating profit continues to be derived in Spain and elsewhere in Western Europe. The outlook change also acknowledges Repsol YPF’s improved financial situation and its financial strategy to achieve a lower risk profile. The group has successfully reduced its debt burden through free cash flow and asset disposals which is now being reflected in Repsol YPF’s improving interest and cash flow to debt coverage ratios. Going forward, Moody’s does not anticipate that debt will continue to fall as Repsol YPF will likely begin to increase modestly its investment programme to reshape its business portfolio. The rating takes into account the group’s financial flexibility to do so. Repsol YPF is targeting financial ratios consistent with a higher rating in order to offset its large exposure to Argentina. Moreover, it is maintaining sufficient cash and short-term liquidity to meet maturities over a period in excess of one year, providing a cushion in case of future crisis.
In the first half of 2003 Repsol YPF generated over half of its operating profit from its subsidiary YPF S.A. in Argentina, which has a Moody’s country ceiling rating of Caa1. This heavy concentration has impacted Repsol YPF’s rating negatively over the past 18 months as Argentina has suffered its severe economic crisis, and resulted in Moody’s downgrading Repsol YPF progressively from A2 to Baa2, with negative outlook. The downgrades reflected Moody’s concerns that Repsol could suffer from increased fiscal and currency control burdens in its operations in Argentina as well as reduced domestic pricing and demand, and might cease to have access to the cash flows of YPF to help service group debt. Moody’s has been concerned that Repsol YPF might be required to service YPF’s debt as well as its own to avoid any cross default or, in an absolute and remote worst case scenario, could even lose control of its subsidiary. This would have had a further impact on Repsol as its standby facilities generally have material adverse change language in them which would be triggered by such an event. As it has turned out, the successive Argentine governments have increased YPF’s tax payments and have frozen some of its domestic prices, but have stopped short of taking greater control of YPF’s export proceeds and have not taken any steps towards renationalisation. Moreover, the recent preliminary agreement with the IMF and increased exchange rate and domestic financial stability appear to indicate that the worst may be over. As a result Moody’s has raised the country ceiling for foreign currency bonds in Argentina from Ca to Caa1.
Repsol YPF, headquartered in Madrid, Spain, is a major international oil and gas company with business concentrations in Argentina, where its B1-rated subsidiary YPF is located, and in Spain.
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